Learn. Share. Evolve…

0:00:03 We met with one firm, Ben, you might remember one of the partners said,
0:00:05 venture capital is like being at the sushi boat restaurant.
0:00:07 Thousand startups come through and you just meet with them.
0:00:11 And then every once in a while, you kind of reach down and you just pluck a startup out of the sushi boat and you invest in it.
0:00:13 And I was like, oh my God.
0:00:16 By the way, the sushi there is typically not great.
0:00:20 What does it take to build a venture firm from scratch?
0:00:23 And how should it evolve as the world changes around it?
0:00:28 I recently sat down with Mark and Ben for a wide ranging conversation on the origins of A16Z,
0:00:30 the evolution of the venture capital industry,
0:00:34 and the structural choices that have shaped the firm from platform to federation and beyond.
0:00:41 We talk about everything from how A16Z got started in 2009 to how we think about platform media governance
0:00:44 and why venture is more barbell shaped than ever.
0:00:47 As it happens, this conversation took place during my first week.
0:00:51 So it was the perfect moment to reflect on where the firm has been and where it’s headed.
0:00:54 This episode originally aired on the Ben and Mark show,
0:00:57 which you can follow for more candid conversations from inside the firm.
0:00:59 Let’s get into it.
0:01:06 The content here is for informational purposes only,
0:01:10 should not be taken as legal, business, tax, or investment advice,
0:01:13 or be used to evaluate any investment or security,
0:01:18 and is not directed at any investor or potential investors in any A16Z fund.
0:01:24 Please note that A16Z and its affiliates may maintain investments in the companies discussed in this podcast.
0:01:30 For more details, including a link to our investments, please see A16Z.com slash disclosures.
0:01:35 Hey everybody, welcome to another episode of the Ben and Mark show.
0:01:37 I’m Eric Torenberg.
0:01:41 I’m Andreessen Horowitz’s newest general partner, and this is my first week.
0:01:47 Lots of exciting things planned for the future of the firm, but we thought that this would be a great opportunity to talk about a bit of the history,
0:01:52 about the conversations that led you guys to start Andreessen Horowitz.
0:01:55 When did you know that, hey, you guys had to do this?
0:02:01 I think it was a conversation on AOL Instant Messenger, if I recall it correctly.
0:02:08 We had sold Opsware to HP and had been out of it for a little while.
0:02:12 We had started doing some angel investing and that kind of stuff.
0:02:15 We had an angel fund called Horowitz Andreessen.
0:02:17 That’s not even a joke, too.
0:02:24 So we were doing that, and we were talking about what might each one of us do next.
0:02:36 And as I recall it, and Mark might recall it differently, he said, you know, venture capital is so underwhelming in that it’s a great product for investors, for LPs,
0:02:42 but it’s a kind of very mediocre product for entrepreneurs because, you know, you get almost nothing.
0:02:51 You get like some money and then a smart person, but, you know, that smart person, they see you once a quarter, they don’t know much about what you’re doing.
0:02:54 So their value kind of diminishes to zero in about three or four months.
0:02:58 And we thought, you know, it’s so hard to build a company.
0:03:00 Somebody ought to be able to do something better than that.
0:03:09 And I said to Mark, I was like, we could start a firm and we could call it Ben Mark, you know, which was a pun on benchmark.
0:03:12 I don’t think I ever got that until just now.
0:03:12 Yeah.
0:03:15 So that was the beginning of the conversation.
0:03:18 And I was surprised because Mark was into the idea.
0:03:21 I think he had the idea separately.
0:03:23 So it was just one of those things.
0:03:27 I’m just like absolutely amazed and flabbergasted that venture capital even exists.
0:03:29 My first 22 years of life, I had no idea.
0:03:30 I had never heard about it growing up.
0:03:32 I never heard about it even in college at Illinois.
0:03:36 And I came to Silicon Valley and my first business partner, Jim Clark, was like, yeah, we start a company.
0:03:38 We go raise money from these venture capitalists.
0:03:39 And I was like, what’s that?
0:03:44 And it just like completely blew my mind that there were these people.
0:03:47 They were literally scouting for basically crazy startup entrepreneurs to start these things.
0:03:49 And they would give you money when you had nothing.
0:03:51 And I was like, wow, that’s amazing.
0:03:53 And so one is just the fact that Field Exists is amazing.
0:03:56 VC and its modern form started in the 1960s.
0:04:01 And I just look back at the history of these guys, Don Valentine and Tom Perkins and Pitch Johnson and Bill Draper, Arthur Rock.
0:04:09 These guys for me are like legends because the fact that they could go out and source a Bob Noyce, you know, to start Intel or Steve Jobs to start Apple or these things is just amazing.
0:04:11 I had quite good experiences.
0:04:17 Ben mentioned the issues with the field, but Ben and I had the chance to work with two VCs at the very top of their game when their firms were on top of the world.
0:04:21 And that was John Doerr when he was at Kleiner Perkins in the 90s and was kind of the top VC.
0:04:25 And then later, Andy Rockleff, who was a founding partner of Benchmark, when they were kind of on top of the world.
0:04:30 And, you know, in general, we got a lot of value from those guys and considered them partners and had very good relationships.
0:04:32 And they helped us build, I think, good businesses.
0:04:35 But basically, over the years, what happened was we kind of learned from those experiences.
0:04:41 But also what happened over the years was Ben and I had become active angel investors and sort of advisors and mentors to a new generation of founders.
0:04:44 And this is in the 2000s through the 2000s.
0:04:49 And just so people understand the setting for this, after the dot-com crash in 2000, there had been an angel and venture boom in the late 90s.
0:04:55 And then after the dot-com crash in 2000, like almost all angel investing went away and a large amount of VC went away.
0:04:58 And, you know, it was like a full-on depression for early stage tech.
0:05:02 So about like 2004, the crash sort of unspooled over five years.
0:05:08 And by 2004, when Ben and I kind of ramped up our angel investing, I think, I don’t know, maybe the whole industry is down to like a half dozen angel investors or something.
0:05:09 I mean, it was just a tiny.
0:05:09 Yeah, it was small.
0:05:10 We knew all of them.
0:05:13 Angel investors had so much power that there was this scandal.
0:05:17 Angel Gate, remember, of like angels meeting together and fixing prices.
0:05:18 The Angel Gate, yeah.
0:05:19 Well, we all talked to each other.
0:05:21 So there was something to that.
0:05:25 So then basically tech started to take off again in the late 2000s.
0:05:31 And then TechCrunch at the time, Michael Arrington had built up a TechCrunch to be kind of the main online news source for startups and venture investing.
0:05:38 And Michael, one of his like most remarkable things was he was at some dinner and he somehow cracked the code that there was a back room at the dinner where like all of the, actually Ben and I were not there.
0:05:44 But like most of the prominent angel investors of that era were basically sitting around this round table and Michael Arrington kind of walks in and he’s a journalist.
0:05:47 And at least he described it as like these massively guilty looks on everybody’s faces.
0:05:49 Ben and I weren’t there, so I don’t know what happened.
0:05:52 But the accusation was that they were colluding, right?
0:05:57 They were sort of, you know, all teaming up to try to see if they could keep valuations low, which is a no-no in business.
0:06:02 But a significant thing about that maybe is that that actually meant that there were enough angels to actually fill a table, right?
0:06:05 Because that was like when there were like a dozen of them as opposed to just a half dozen.
0:06:09 Yeah, anyway, so Ben and I just started working with what turned into be dozens of founders.
0:06:12 And, you know, we ended up being very involved in because we had raised venture before and run companies.
0:06:15 We ended up helping a lot of startups in that era raise venture.
0:06:19 And so we helped them meet the venture firms and understand how to negotiate the deals.
0:06:23 And then the other thing that happened was is we would get called in when they would get sideways with their VCs.
0:06:25 It’s happened kind of a lot.
0:06:25 A lot.
0:06:30 So this became, it turns out, this is one of the main things people were calling us on was like, all right, I’m in some big fight with my VC.
0:06:34 He wants the money back or this or that, or he freaked out at the board meeting and what’s going on.
0:06:37 And I hear rumors this firm is shutting down and he’s going to fire us on my stock.
0:06:43 Or, by the way, or the VCs would call us up and they’d be like, this founder is nuts and could you please talk to him and try to get him to like do the right thing.
0:06:48 So we ended up in this sort of, I don’t know, arbitrator, coach, judge, arbitrator mode helping patch these things up.
0:06:57 And I think, Ben, because you and I were angel investing at that point, a big part of it was, well, hell, like if we’re going to end up doing that anyway, if we just showed up with the checkbook, we could short circuit the process.
0:06:58 Yeah, yeah, yeah, yeah, right.
0:07:00 We wouldn’t have to fix all these problems.
0:07:00 I mean, yeah.
0:07:14 And that was like a little bit of it as well, which is there were just very few people at that point in venture capital world who had built any kind of company that had gone to any kind of complexity or was worth anything.
0:07:17 It was just a different kind of background to people.
0:07:24 So the ability to relate to founders, like really relate to founders, was a little bit missing.
0:07:28 Okay, so you decided to start Andreessen Horowitz in 2009.
0:07:30 You come out with a $300 million fund.
0:07:34 Talk about what the strategy was going into it or how you were planning to differentiate from the outside in.
0:07:36 You know, you guys were very loud.
0:07:37 You had this platform approach.
0:07:40 Talk about behind the scenes, how you thought about differentiating.
0:07:46 By the way, like the big VCs at that time seemed just overwhelmingly invincible.
0:07:50 They were giant, like long-lasting businesses.
0:07:54 I mean, the whole industry had been around for 50 years.
0:08:04 Some of these guys had invested in like every good, I mean, if you look at some of the things Sequoia had invested in along the way, it’s like quite a spectacular set of companies.
0:08:08 And so we’re trying to figure out how to challenge the status quo.
0:08:17 And one of the ideas we had was we would do like a lot of angel investments in addition to venture investments, which was unheard of at the time.
0:08:20 And we would start out in this complimentary way.
0:08:29 And then like eventually we’d build enough reputation where we could start doing kind of the A’s ourselves was how we pitched it.
0:08:31 And we actually took it around.
0:08:39 We visit a lot of our VC friends and many of them said it was a really dumb ass idea and we should definitely not pursue it.
0:08:42 And it’s been tried before and it didn’t work and so forth.
0:08:53 And then the other idea that we had was what I alluded to earlier, which is, gee, like what if the venture capital firm and we got a lot of this from our friend Michael Ovitz from CAA.
0:08:58 So what if the firm wasn’t just a collection of partners?
0:08:59 What if it was more than that?
0:09:05 What if rather than paying the partners a lot of money or in our case, we didn’t pay ourselves any money?
0:09:07 What if we took all that money?
0:09:08 Because it was a lot of money.
0:09:11 You know, we’re like even on a $300 million fund, it was a really a lot of money.
0:09:33 What if we took that money and we built a platform and the purpose of that platform was to give an entrepreneur basically the confidence and power of a big time CEO like a Bob Iger or a Jamie Dimon or somebody like that who could literally pick up the phone and call anybody like at any time.
0:09:37 Why should I be CEO of this little company, even though I’ve never managed anything myself?
0:09:39 All I did was invent the product.
0:09:48 Well, because like Bob Iger, I call anybody from the president of the United States to the CEO of FedEx or whatever, and I can get them on the phone.
0:09:51 And so we’re like, what if we built that capability for our companies?
0:09:56 And people said, I think that criticism was it’s been tried.
0:09:57 It’ll never work.
0:09:58 You guys are stupid.
0:10:01 That was like the polite version of it.
0:10:05 You know, those two things were really the original idea that we pitched.
0:10:09 In fact, if you look at our original deck, that’s how we pitched LPs.
0:10:12 And the first fund works, right?
0:10:16 I believe you put $50 million into Skype and there’s a big markup there in that acquisition.
0:10:17 There’s Instagram.
0:10:18 It’s actually $65 million.
0:10:24 But 15 of it was generously given to us by Silver Lake for participating in the deal, yeah.
0:10:26 But we invested $65 million, yeah.
0:10:30 Yeah, so Instagram, TinySpec, which turned into Slack.
0:10:31 So the first fund is a winner.
0:10:32 Yeah, Okta.
0:10:33 Okta.
0:10:37 Did you know, fund one, what your long-term vision was?
0:10:41 Would you say, hey, we’re going to start 300 and then we’re going to scale and be one of the biggest firms in venture?
0:10:43 Or what were you thinking was the future at the time?
0:11:01 The thing that Mark and I knew from our experience in starting companies was it is just as hard to start a small boutique thing that means nothing in the world and build it as it is to build the world-dominating monster.
0:11:05 Like, it’s no more amount of work to do the latter.
0:11:08 So we were never interested in anything but the latter.
0:11:16 We had zero interest at all in building a little venture capital firm that was like a beta to the big boys.
0:11:18 We were never wanting to do that.
0:11:24 We always thought, like, this was the start of doing something much bigger and much more important.
0:11:32 And, you know, how we got there, we certainly didn’t have all mapped out from the beginning, but the ambition was always there.
0:11:36 Yeah, and a lot of this comes from the fact that we had been running companies.
0:11:43 And so if you’re running a company, like it’s a product company and it’s in, like, full competitive battle with other companies and you’re going through the wars that companies go through,
0:11:54 like, you naturally think in terms of strategy, ambition, industry structure, the economics of the business, the competitive position, evolution over time, marketing strategy, unique selling proposition, differentiation.
0:11:57 It’s all these things that any business operator thinks about.
0:12:03 And actually, to their massive credit, a lot of the original VCs who built the firms originally back in the 50s, 60s, 70s were actually operators, right?
0:12:05 So Tom Perkins and Gene Kleiner had been operators.
0:12:07 Don Valentine, Pierre Lamont had been operators.
0:12:09 The founders of Greylock had been operators.
0:12:13 And so it was very natural for the sort of first generation to think in those terms.
0:12:17 So by the time we entered the field, their successors, for the most part, had not run businesses.
0:12:19 They had sort of grown up as professional investors.
0:12:21 And they were, you know, inheriting businesses that other people had built.
0:12:25 And so there was just this sort of fundamental difference in mindset.
0:12:27 And by the way, the formula is working very well for them.
0:12:30 They were very happy to, you know, the cliche goes kind of sit on Sand Hill Road and the deals.
0:12:35 I mean, I’ve got countless stories in this, but we met with one firm, Ben, you might remember, a very prominent firm.
0:12:38 And one of the partners said, it’s like, oh, venture capital is like so much fun as a business.
0:12:42 He’s like, venture capital is like being at the sushi boat restaurant, right?
0:12:44 And so these are like the sushi restaurants where there’s like this sort of track.
0:12:49 By the way, the sushi there is typically not great.
0:12:50 Yeah.
0:12:53 That was the first thing that jumped out at me is, yeah, that’s not where the good sushi is.
0:12:55 I wasn’t sure if we went to the same sushi restaurants.
0:12:59 But, you know, you say, if you haven’t met a sushi boat restaurant, you sit there and like literally these little sushi boats,
0:13:02 these little trays go by on the conveyor belt and you just pick up pieces of sushi.
0:13:04 And he said, that’s just what it’s like.
0:13:07 And you just sit here on Santa Road and a thousand startups come through and you just meet with them.
0:13:08 And every once in a while, you eat it with his hand.
0:13:12 You kind of reach down and you just pluck a startup out of the sushi boat and you invest in it.
0:13:15 And I was like, oh, my God.
0:13:18 You know, like, you know, complacency, right?
0:13:19 Like entitlement.
0:13:23 Immediately, it was just, you know, the hair on the back of my neck went up and I was like, all right.
0:13:24 So, you know, basically a soft target.
0:13:25 Yeah.
0:13:30 We were just so oriented, you know, with a startup, all you do is work and you’re focused on the work.
0:13:35 And if you aren’t doing enough work, you think of other work that you could do that might improve things.
0:13:41 So it was such a foreign idea that you would be oriented around doing no work.
0:13:47 Like literally sitting in a sushi boat restaurant and having a great life and playing golf or whatever they did.
0:13:51 And so that was inspiring that like, okay, we can do it better.
0:13:54 And by the way, like building a company was so hard.
0:13:58 And so any additional help would be so appreciated.
0:13:59 Yeah.
0:14:00 It was how we always thought about it.
0:14:01 Yeah.
0:14:03 By the way, one more story.
0:14:04 So around the same time, we met with another VC.
0:14:06 And like I said, we’d been running companies.
0:14:07 We’d been dealing with investors.
0:14:09 And then we’d been running public companies.
0:14:10 Ben was the CEO of a public company.
0:14:14 And so when you’re running a public company, you’ve got investors, you’ve got your investor relations team.
0:14:16 But like you’ve got hedge funds invested in your company.
0:14:18 And like when you meet with them, you don’t even know if they’re long or short your stock.
0:14:20 Often short.
0:14:21 Often short.
0:14:25 So like half the time, you’re giving them like ammunition that they’re going to use to try to go out and swear you and drive your stock price down.
0:14:29 So it’s just like absolute bedlam when you’re running a company with shareholders.
0:14:32 And so in venture, it’s different, or at least we thought it was different.
0:14:34 Because your investors and the funds are called limited partners.
0:14:38 And these are these institutions like endowments and foundations and sovereigns and so forth that invest.
0:14:40 And then they invest on these lockups.
0:14:42 They invest on like these 10 or 15-year lockups.
0:14:45 So they put the capital in and they really sit patiently and let you do your thing.
0:14:51 So we were just like, wow, dealing with an investor who is locked in to belong with your company for 15 years sounds like the best thing in the world.
0:14:52 Like this sounds amazing.
0:14:53 These are like super smart people.
0:14:57 We’re running these endowments, people like David Swenson and others and Ann Martin and all these people.
0:14:58 And so we were like, wow, this is going to be great.
0:15:01 And then we met with a very famous, prominent, longtime VC.
0:15:05 He said, boys, he said, the part of the job you’re going to hate the most is dealing with the LPs.
0:15:07 Because he said, these people are like not smart.
0:15:08 They’re not, you know, whatever.
0:15:12 And he’s like, the way that you do it is you treat your LPs like they’re mushrooms.
0:15:14 You put them in a cardboard box.
0:15:18 You put the lid on the cardboard box and you put the box under the bed and you don’t take it out for two years.
0:15:28 He literally said that, which was like, it was such an insane thing to hear because like we treated hedge funds that were shorting us better than that.
0:15:43 But then, you know, like when we went out, this was actually the thing that kind of made me know that we had made a good choice by starting the firm was when we went out to visit the potential LPs, you know, and we’re pitching them and so forth.
0:15:46 Now, look, they had very interesting things to say.
0:15:48 They knew a lot about the industry.
0:15:51 And they knew a lot about investing in general.
0:15:56 And Dave Swanson, who Mark mentioned, wrote the definitive book on like how endowments invest and so on.
0:16:08 And then when they invested, they were so interested in us, which, you know, it’s just a nice thing in life when anybody takes any interest in you.
0:16:14 And our LPs did 30 or 35 reference calls on both me and Mark.
0:16:16 Every single one of them did.
0:16:18 And they learned a lot about us.
0:16:20 I mean, they really got deep on it.
0:16:26 And funny, actually, one of the funny things about the firm is I think we’re the only firm in Silicon Valley who has this.
0:16:35 We have a two person key man thing where so normally as long as one person is intact, there’s no vote on the fund or whether the fund continues.
0:16:41 But in fund one, both of us had to be there because they’re like, you guys are both flawed.
0:16:43 But when you’re together, the flaws go away.
0:16:45 Like they had gotten that deep on us.
0:16:46 And so it was cool.
0:16:48 Say more about that.
0:16:50 How do you guys complement each other?
0:16:51 Say more about what they were getting at.
0:16:54 So like there was Netscape and LoudCloud.
0:16:58 And I think that with Netscape, Mark started that company.
0:17:01 He’s 22 years old or 21 to 22 years old.
0:17:02 And so he’s like literally a kid.
0:17:05 So he had some things in his reputation.
0:17:07 For one, he was like actually a little kid.
0:17:08 Like you grow up.
0:17:11 The shit that I couldn’t do when I was 22, I can do now and so forth.
0:17:12 So there was some of that.
0:17:14 And then there was some of the same thing on me.
0:17:17 Like, you know, LoudCloud got into absolutely horrible trouble.
0:17:20 We burned through a stupid amount of cash and this and that and the other.
0:17:23 And so there were definitely negative things.
0:17:26 But it was interesting because both companies had very good outcomes.
0:17:34 And so I think how the legend went was somehow, you know, between us, we could figure it out.
0:17:36 Now, I don’t know if the criticisms were right.
0:17:37 Maybe they were.
0:17:47 And I don’t know if the solution was correct, but it was just kind of a fun thing that they had got so deep into our backgrounds that they would, like, insist that that be in the LPA.
0:17:54 Talk about how you guys have made it work or divided, you know, divided and conquered or just your working style or whatever you could share about that.
0:18:02 We’re co-founders and we work very, very closely together on the strategy and the direction of the firm.
0:18:06 But, like, the CEO position is a chain of command position.
0:18:10 And, you know, that’s me.
0:18:13 I’m the CEO of the firm in that sense.
0:18:19 You know, Mark doesn’t try to override, like, you know, these kinds of chain of command decisions.
0:18:22 It’s not, you know, his thing.
0:18:25 And then, you know, like, Mark, of course, does things that I can’t do.
0:18:27 He’s just like a much bigger celebrity.
0:18:37 He’s, you know, kind of, I always say, like, he’s a little bit of a magic trick that people in the firm call him Mark GPT because he knows everything about everything.
0:18:39 So, like, he’s got very unique things that he does.
0:18:44 Mark initially recruited me and then said, hey, Ben Eric, you guys figure out the details.
0:18:45 Yeah.
0:18:46 So, that’s a good example.
0:18:52 So, you know, Mark had kind of been on this thing that, look, the world has moved.
0:19:02 And the way we kind of market the firm and think about the media hasn’t changed nearly as much as the world has moved.
0:19:05 And so, we need to bring somebody in.
0:19:08 And, you know, I was like, do you have someone in mind?
0:19:10 And he had you in mind.
0:19:12 And so, I was like, okay, good.
0:19:15 So, I listened to, you know, and I had been on the show, so I knew who you were and whatnot.
0:19:19 But I went back and listened to a lot of the turpentine stuff and so forth.
0:19:22 And I was like, yep, that seems like a good idea.
0:19:27 And then it was on kind of me as in my kind of CEO job to put the thing together.
0:19:34 And, Mark, maybe just give us a couple minutes on how the world had changed from it.
0:19:36 We’ll do a whole separate episode, deep dive on it.
0:19:43 But maybe just preview what was sort of the main change that you identified of like, hey, the world has changed from a media perspective.
0:19:45 Yeah.
0:19:55 So, you know, a lot of my thinking on this is from a book from our friend Martin Gurry that he wrote back in 2015 called The Revolt of the Public and the Crisis of Authority in the New Millennium.
0:20:05 And so, basically, it’s like the world really did change, like how information flows through the world really did change, not just with the arrival of the Internet, but specifically with the arrival of social media.
0:20:23 And so, you know, it just so happens that like all of us who grew up over the last 70 or 80 years, like we grew up in an environment of primarily top-down media, you know, in which there’s, you know, these sort of major kind of forces in, you know, broadcast, you know, TV or cable TV or newspapers and magazines where, you know, editors and publishers and reporters.
0:20:27 And they sort of write all the stories and then, you know, it’s everybody else’s job to kind of read them and keep up.
0:20:32 You know, to a world that looks, you know, completely different, whereas it’s basically everything is peer-to-peer.
0:20:37 And so, you know, hierarchy to network and then centralized institution to, you know, decentralized network.
0:20:41 And, you know, that’s happening throughout the economy and throughout, you know, throughout society.
0:20:43 And, you know, there’s good and there’s bad to it.
0:20:47 And there’s, you know, tons of, tons of arguments to be had about it, but it is happening.
0:20:55 And so just, you know, in the new world, it’s just, you’re not, if you’re running a business or running a movement, like you’re just not going to do it through the traditional method.
0:20:59 You may still participate to some extent, but you’re going to primarily tell your own story.
0:21:00 I mean, you’re going to go direct.
0:21:05 I mean, you’re going to have your own relationship with your constituents or with your fans or with your customers.
0:21:12 And, you know, like in some sense, that sounds like, it all sounds like a truism and a cliche, but like, I think there were a couple of tipping points where it really started to happen.
0:21:19 And one was around 2015 because social networking kind of hit mainstream and smartphones hit mainstream around that time, which is when Martin wrote his book.
0:21:34 But then I think really it’s only been in the last five years when I think almost everybody, like, let’s say, let’s say basically everybody under the age of 70 and a very large number of people over the age of 70 basically have shifted from top-down media as their main source of information to social media as their main source of information.
0:21:40 And so it actually is relatively new to live in this world in which the information really does flow differently.
0:21:44 And so, like, it’s just a fundamental shift.
0:21:50 And so I think, you know, as a firm, we spent, you know, as Ben said, we always had a big focus on marketing and in telling a story.
0:21:56 You know, we did that primarily through the old centralized channels from 2009 to, you know, probably 2017 or something.
0:22:01 You know, but really since then, it’s been, you know, at least as effective or more effective to kind of do it the new way.
0:22:04 And, you know, it’s like the old William Gibson thing.
0:22:06 It’s like the future is already here.
0:22:07 It just isn’t evenly distributed yet.
0:22:09 Like, everything I’m saying, people can, like, nod out.
0:22:13 But, like, you know, as you know, Eric, like, most companies have still not adjusted to this.
0:22:13 Right.
0:22:16 Most politicians have still not adjusted to this.
0:22:18 Most entertainers have still not adjusted to this.
0:22:20 Most sports leagues have still not adjusted to this.
0:22:24 And so it’s very important that we continue to do it.
0:22:27 And then I think it’s also important that we set an example for our portfolio companies.
0:22:30 Yeah, and a lot of it has to do with kind of like the apparatus, right?
0:22:36 Like, so there’s the, you know, from a company standpoint, you know what you do.
0:22:38 Like, you know, we know how to help entrepreneurs, this and that.
0:22:42 And the other, what a, you know, product company knows how to build their product and so forth.
0:22:45 And then it’s like, okay, and now you’ve got to get your message out.
0:22:45 How do you do that?
0:22:54 And then the apparatus that gets your message out, all the people, all the kind of tools, all the channels are oriented, at least partially in the old world.
0:23:06 And so, you know, you, it actually is, you know, and somebody’s much longer to adjust than it is for the individual consumer who goes, oh, there’s just better stuff over here.
0:23:16 Yeah, and Mark, also talk about the shift from corporations to individuals in terms of kind of where brands went and who people want to hear from.
0:23:20 Not to say there isn’t, of course, a role for the corporation, but talk a little bit about that for the corporate brand.
0:23:24 Yeah, so rewind history a little bit.
0:23:25 So it’s actually pretty striking.
0:23:29 Like, this sort of decentralized media environment that we’re entering is not new.
0:23:30 It’s actually very old.
0:23:35 And correspondingly, the centralized media environment we all grew up in is not the historical norm.
0:23:43 And so basically, the way that we think about centralized top-down media today is basically an artifact of basically the period of the 1940s through, you know, essentially the 1970s.
0:23:47 Like, before the 1940s, you didn’t have top-down media in the same way.
0:23:50 If you go back to the 1930s or before, you had a much larger number of newspapers.
0:23:53 You had a much larger number of radio stations.
0:23:58 You had a much larger number of sort of fly-by-night publishing operations, you know, pamphlets and so forth.
0:24:06 And then if you go back even further, one of the most interesting things to study on this is just go back to the American Revolution, you know, the time of the colonies in the 1760s through, like, the 1790s.
0:24:15 And it basically, I’ve been rereading some of this stuff recently, like, basically the media environment of the colonial American era was a lot like today’s social media environment.
0:24:18 You would have 15, 20, 30 little newspapers per city.
0:24:21 They would be, like, they would occupy every micro-sliced knit.
0:24:22 You know, talk about echo chambers or whatever.
0:24:25 Like, they each have their own little echo chamber.
0:24:28 You know, the founding fathers would write all these columns and essays.
0:24:31 They would fight things out by writing essays, and then they would publish the essays under pseudonyms.
0:24:37 And you’d have these characters like Benjamin Franklin or Alexander Hamilton that would literally have, like, a dozen or two dozen pseudonyms at a time.
0:24:40 They’d actually write – they’d actually get into fights with themselves.
0:24:42 They’d actually – they’d have their pseudonyms actually fight with each other.
0:24:48 Ben Franklin used to set up arguments against his different pseudonyms to drive – you know, to really, like, litigate out an issue and to drive newspaper sales.
0:24:55 But, like, really serious stuff also, like the Federalist Papers, which were kind of the explanation of the new Constitution in 1789.
0:24:57 Hamilton and Madison wrote those under pseudonyms, right?
0:25:01 And so this idea of, like, the Internet Anon is, like – that’s an old idea.
0:25:03 And the idea of a pseudonym is an old idea.
0:25:06 And the idea of, like, self-publishing is an old idea.
0:25:12 And the idea of, like, basically these pitch, smash-mouth battles, you know, with very little centralized control over what people say.
0:25:22 Like, you know, if you read about, like, how, you know, like, Hamilton and Jefferson and then also Jefferson and Adams had these just, like, absolute – they had their own, basically, pet newspapers.
0:25:24 And it was just, like, absolute level of smash-mouth politics.
0:25:31 Like, I would say even more, like, extreme and deranged than even what we have today, which people kind of can’t believe.
0:25:40 But, like, if you read about the election of 1800, like, it was maybe – I think it was more extreme than certainly any election in my lifetime in terms of, like, what – you know, it’s literally John Adams and Thomas Jefferson, like, just, like, slandering –
0:25:41 So, polarization is the norm.
0:25:44 Like, really, like, on every conceivable front.
0:25:49 Yeah, so, like, polar – you know, sort of as our – you know, as they say, unfettered conversations were the norm.
0:25:51 Anonymity was the norm.
0:25:54 You know, rumor, you know, scurrilous, you know, accusations were the norm.
0:25:58 You know, pitch back – you know, sort of Overton window being wide open was the norm.
0:26:06 And so – and just for people who want to read about this, the best book on this is called Infamous Scribblers, which was sort of the name for journalists in those days.
0:26:09 And so, like, you know, this has happened before.
0:26:19 And so, anyway, so the point is, like, this sort of centralized media thing that we’ve been living in that we grew up in or, you know, people my age grew up in, like, it’s a historical aberration off the norm.
0:26:21 And, again, it’s a consequence of technology change.
0:26:28 It’s a consequence of this sort of mass publishing, mass media, mass radio, mass television, mass newspaper kind of thing that only started in the 1940s.
0:26:39 And then correspondingly, therefore, you know, Eric, to your question, like, everything that we think of as corporate branding is an artifact of just a specific point in time of the sort of 1940s through call of the 1980s or something.
0:26:54 Like, all of, like, brand marketing, corporate brands, corporate messaging, corporate crisis management, like, all these playbooks that they teach at business school were very specific to a time and place that had a very small number of centralized media outlets with tremendous influence and control.
0:26:58 But, and therefore, the corporate brand, like, why does the corporate brand exist?
0:27:01 Like, why does a Procter & Gamble brand or any of these brands exist?
0:27:06 It exists because if you have centralized media, you know, information is going through this very narrow straw, right?
0:27:09 There’s very little bandwidth to get something on a TV.
0:27:13 You have very little bandwidth to get something in the newspaper and, therefore, to get it to consumers’ attention.
0:27:17 And so you kind of had to wrap up everything about a company into, like, a single word and a single image.
0:27:22 And then you would just, through advertising, you would just pound that over and over and over again, trying to get people to remember it.
0:27:24 But that’s because that’s all you could do.
0:27:34 If you open everything up and everybody can publish and everybody can debate and everybody can be present and everybody can, you know, and then you have these, you know, individual, you know, influencers, you know, with 200 million followers and all this stuff.
0:27:41 Like, all of a sudden, you have this completely different method of communicating with an audience that can be much more based on personality, right?
0:27:45 So, authenticity, transparency, and then personality, right?
0:27:46 That there can actually be a human being.
0:27:51 And then it just happens, like, because your audience always consists of people.
0:27:56 People relate much more to other people than they relate to a corporation, right?
0:28:06 And so, as an individual, am I going to feel a stronger emotional affinity to, like, a person who I follow or to some, like, disembodied corporation with an office tower in New York City?
0:28:12 And if the communication bandwidth is there where I can interact with both of them, of course, I’m going to have a lot more affinity for the people.
0:28:14 And so, I think I’m sort of a radical inside.
0:28:20 I think the whole idea of, like, corporate brands is basically just, like, it kind of, they’re on their way out.
0:28:23 Like, it’s just as a concept, it just doesn’t make sense in the new media environment.
0:28:28 And then correspondingly, the site, you know, the terms people use these days, like influencer marketing and so forth.
0:28:31 But the parasocial relationship is actually a really interesting one.
0:28:34 You know, sort of one-to-many personal relationships.
0:28:40 You know, I just think so much of how this is going to work in the future is this is based on relationships with individuals.
0:28:42 And obviously, you know, like, this is happening, right?
0:28:47 Everything I’m describing is what’s happening in the entertainment industry and is happening, you know, consumer brands.
0:28:53 And you’ve got, you know, Kim Kardashian with these, you know, with these multibillion-dollar businesses, you know, being direct marketed online.
0:28:54 You know, many people doing this.
0:28:56 Many politicians, you know, are now adapting to this.
0:28:57 And so, this is happening.
0:29:00 But I just, I still feel like it’s underestimated.
0:29:07 And if we project forward 10 years, you know, most people, most people are going to think about, most people are going to think about the people they relate to as opposed to the companies they relate to.
0:29:18 It’s very interesting how you bring that up, Mark, about that, you know, there were no kind of centralized medias and no corporate brands or corporate brands weren’t the thing kind of pre-1940s.
0:29:30 Because as a kid, I always was surprised that I knew more entrepreneurs from like pre-1940 than, so I knew Thomas Edison and Henry Ford.
0:29:34 Ford and JP Morgan, but who are the entrepreneurs after that?
0:29:35 And they weren’t.
0:29:36 They were just corporations, right?
0:29:41 Like, you didn’t know, actually, who ran any of those things, you know, even the new companies at the time.
0:29:48 Just, you know, it would leak out slowly and so forth, but it wasn’t really a thing.
0:29:55 And then now, you know, we’re getting all these celebrity CEOs again are kind of, that idea is re-emerging, which is fascinating.
0:29:56 Yeah, that’s right.
0:30:05 And people kind of can’t believe it, but like before like 1930, like number, either you, like literally you would just go to the store or it was just like the corner store.
0:30:10 And then you would buy like, you know, a pan and they weren’t branded.
0:30:18 Like, you know, maybe, or maybe it was like Joe’s store, but it wasn’t like, it wasn’t like, you know, and so like the, like consumer brands didn’t exist in the modern sense.
0:30:27 And then to Ben’s point, like to the extent you knew any, any business, it was at scale, it was, you know, businesses, you know, prior to like 1930, they were almost all named after their founders, you know, kind of for that reason, right?
0:30:28 It was the Ford Motor Company.
0:30:38 And so, and then it was actually this, you know, there’s this whole school of psychology is actually, I think it was Freud’s son-in-law, if I remember correctly, Edward Bernays, who was sort of the father of public relations.
0:30:43 You know, it was the new field in the 1920s when, when radio and newspapers took off and centralized kind of media started to take off.
0:30:49 And, you know, they sort of created this whole psychological theory of, of, of, of creating these sort of abstract brands for the, for the reasons that I described.
0:30:57 But, you know, by the way, which is very linked to the, although the methods also political propaganda, you know, that became, you know, kind of very successful, you know, in those days.
0:31:08 But it’s just, it, it, it, it is amazing to me as it’s like, you know, there were hundreds of years before there were hundreds of years of industrialization before that and modern, modern economic activity before that, where those things, you know, essentially didn’t exist.
0:31:19 And, and, and that’s why I’m, I’m so confident in, in, in sort of pegging all this to technology shifts, which is that, you know, the thing that shifted, the thing that shifted how we think about companies happened as a consequence of the shifts in communication technology.
0:31:25 And then correspondingly, if the communication technology unwinds, which is what’s happening, then you’re actually going to go back to the future.
0:31:26 And yeah.
0:31:28 And then of course there’s, there’s more data points to support that every day.
0:31:32 And is this something you guys had internalized in 2009?
0:31:37 Is that, is that why you called the firm injuries and Horowitz when any, every other firm was going for some big deal?
0:31:38 No, that was a different thing.
0:31:44 So what happened then, so when we were raising the money and it was, you have to remember it’s 2009.
0:31:47 So it was a difficult year to raise venture capital.
0:31:50 In fact, I think there were only two new funds raised that year.
0:31:51 There was Zara’s and Khosla.
0:31:59 So the, the biggest, the number one objection we got on the fund was, you guys are very successful entrepreneurs.
0:32:06 What’s going to stop you from going out and quitting doing this and just starting a company?
0:32:11 And then we’re going to be left holding the bag and nobody’s going to be investing or watching our money.
0:32:13 And we had no plan to do that.
0:32:19 So we got the idea of, well, one easy way around that is just name the firm after ourselves.
0:32:22 Then they’ll know that we’re going to be tied to it forever.
0:32:24 And we did that.
0:32:30 And then I had the idea that since nobody could spell Andreessen Horowitz, we should have this A16C thing.
0:32:31 And that was the name of the firm.
0:32:45 And of course, immediately, all the competitors said that we were egomaniacs and like narcissistically insane because we named the firm after ourselves, which we just ignored.
0:32:47 Like, what can we do?
0:32:48 You know, maybe they have a point.
0:32:50 Yeah, it’s kind of true.
0:32:50 Yeah.
0:32:59 Well, the irony is that you’re still running the firm, you know, 16 years later, still as active as you were beforehand, whereas a lot of other folks have retired.
0:33:01 That is also true.
0:33:03 Yeah, no, it worked.
0:33:04 It did tie us to the firm.
0:33:05 Yes.
0:33:06 Yeah.
0:33:13 And is it as simple as, you know, you guys have had, you know, billions in distributions?
0:33:15 You don’t obviously need to be doing this anymore.
0:33:17 Is it as simple as, hey, this is your baby.
0:33:18 This is where you have the most fun.
0:33:23 What’s kept you going, you know, far after you guys need to, going at this pace?
0:33:27 You know, look, I think that one, the firm always had a mission.
0:33:32 So it was never like, the mission of Andreessen Horowitz was never like, let’s make a lot of money.
0:33:41 That wasn’t, you know, we actually, both of us had, you know, enough money for a normal person, you know, to be happy in life before we started the firm.
0:33:42 So that was never the thing.
0:33:48 It was always, you know, could we make it much easier and better?
0:33:53 Like, could we make it both easier to build great companies and then with those, could we make those companies better?
0:34:01 And then like, what in the world would be that, what possible activity could either of us have that would be more important than that?
0:34:16 Because, you know, one thing Mark and I both share is that, you know, maybe the single best thing that you can do to improve the world is to build a company that, you know, delivers some product or something that improves the world.
0:34:20 Like that is actually, that’s the thing.
0:34:30 It’s actually better than, has a better impact than any kind of activism or political activity or anything else is just like literally just making things that make the world better.
0:34:40 And then, you know, kind of doing something larger than yourself, where you bring a lot of people together to do that and they all kind of grow and improve their lives through it.
0:34:47 So, you know, what could be better than helping people do this single best human endeavor possible?
0:34:52 Like neither of us ever thought there was anything we wanted to do with our time that was better than that.
0:34:59 And so there’s no reason to stop because we don’t have any better ideas, I would say.
0:35:01 You know, like this is the best idea.
0:35:13 Mark told me he got the, there’s a story about the Larry Page, or I think if I understand correctly, Larry Page says, I see no better use of my money than giving it all to Elon Musk to build more tech companies.
0:35:15 Yeah, so that, it’s a little bit of that.
0:35:15 Yeah, exactly.
0:35:18 You know, as a philanthropic idea, for sure.
0:35:25 One other idea I wanted to bring back to the idea of people as corporations is it’s not only the CEOs, right?
0:35:28 It’s, I see us, you know, as building a cinematic universe, right?
0:35:36 It’s, it’s, it’s, it’s the CEOs, but it’s also the surrounding, it’s, it’s Chris Dixon, it’s Catherine Boyle, it’s Martine Cassato, it’s Alex Rampel.
0:35:42 Like you guys have done, you know, basically done a phenomenal job of, of sort of building stars and built, you know, sort of collection of people.
0:35:49 Yeah, so, and I would say about that, you know, we’re not really, you know, we’re not a company, we’re kind of, we’re a firm.
0:35:56 And, you know, those people who we were able to recruit in, like, very, like, hyper talented people.
0:36:12 Really, it’s just like, it’s a platform for those people, you know, and we’re, we’re two of them, but we’re certainly, you know, not, you know, it’s not that hierarchical in that sense is, you know, you probably observe since you’ve been here.
0:36:25 Like, everybody is kind of doing their thing, but in a common context with a common culture and, you know, kind of a mostly common set of investors and so forth.
0:36:29 And so, it’s much more like a team.
0:36:35 It functions more like a team than, than a normal kind of hierarchy, you know, in that sense.
0:36:57 And, you know, it’s great because we were able, like, if you look at the top people, you know, if you look at Martine Cassato and Chris Dixon and Alex Rampell and David Ulovich and so forth, like, that team is better, like, IQ-wise, capability-wise than the executive teams of Meta or Google or Apple or any of them.
0:37:05 And it’s just because, you know, in a way, they’re all the boss and they all act like the boss and that works.
0:37:09 But that’s, that’s just kind of been like a nice outcome of, of the platform.
0:37:19 Talk about how you guys developed this, this idea of a platform because most, most firms don’t have that, didn’t have that, or you guys moved to this sort of almost federated model.
0:37:23 Talk, talk a little bit about how the evolution of the firm and how you guys figured that out or what that was like.
0:37:26 Yeah, so it’s, it’s pretty interesting.
0:37:31 So one of the things, so that, it came in two pieces.
0:37:48 So the, the, the first thing was when we started the firm, the history of venture capital, like if you had done like a back test on it, what you find is there were never, ever more than 15 companies in a year that would ever make it to a hundred million dollars in revenue.
0:37:53 Because, you know, the technology industry, that was like the general size of it.
0:37:59 That’s the, the amount of new technology that the world could absorb, you know, in those days.
0:38:05 But, you know, Mark had an idea which he wrote up in, I think, 2011 called Software is Eating the World.
0:38:21 And the idea behind that was, well, every company that was going to be worth anything was going to be a technology company because software was able to just, to make anything so much better.
0:38:26 And so there were going to be not 15 companies, but 150 or 200 companies.
0:38:34 Now, the result of 15 companies meant the optimal venture capital firm was like six or eight people going after those 15 companies.
0:38:36 You know, each one gets two and you’ve got a monopoly.
0:38:39 So there was no need for it to ever be bigger.
0:38:51 And as a result of that, the way they kind of set up their organizations were basically with something, what I’d say is called shared economics, but also shared control.
0:38:59 And that shared control made sense if you’re only going to be eight or 10 partners or six or 10 partners or whatever.
0:39:04 Because if you’re never getting bigger than that, then you don’t have to reorganize.
0:39:09 You don’t have to make difficult management decisions that people are going to disagree with.
0:39:19 We knew or like we thought software was going to eat the world and we were going to need to be way bigger, way bigger than, you know, six or 10 partners.
0:39:34 And so we were going to have to be able to reorganize, decompose the problem, set up the organization in a way where very smart teams of people could work independently and address the different facets of the industry that needed to be addressed.
0:39:41 And you can see it with American Dynamism and infrastructure and apps and crypto and bio and so forth.
0:39:44 And so we never had shared control.
0:39:46 We always had centralized control.
0:39:53 And this is something we got that advice from, you know, Herb Allen was super helpful in us understanding why that would be important.
0:40:04 And then, you know, also actually Mark’s father-in-law, the late, amazing John Arriaga, was like just very, very clear on like if you’re going to run something, you know, eventually there’s going to be conflict.
0:40:07 There are going to be these issues and you’ve got to have control.
0:40:08 And that’s going to be important.
0:40:13 You know, it’s not important until it is important and then it’s the only thing that matters.
0:40:25 And so, you know, with that control, we’ve been able to kind of reorganize, reimagine the firm and then go address every single kind of vertical where you need.
0:40:34 Like the people who know American Dynamism, like to know that in depth, everything from like rare earth minerals to rockets to these kinds of things.
0:40:39 There’s no way those same six people are going to know everything about crypto.
0:40:40 It’s not even possible.
0:40:42 Like these fields are too deep.
0:40:46 And not only the technology, but also the whole entrepreneurial ecosystem.
0:40:51 And so you need separate teams to address these separate, very large markets.
0:40:54 Whereas before you just needed a person on that.
0:40:57 Like you could have a person on crypto would be fine or a person on AI would be fine.
0:40:58 No, no, no.
0:40:59 That’s never going to work again.
0:41:08 And so our ability to field a whole team against that and restructure things and say, okay, you were doing consumer internet.
0:41:11 Like that’s not going to be relevant in the next 10 years and so forth.
0:41:15 These kinds of things are very hard to do if you don’t have control.
0:41:23 And those two examples, crypto and American Dynamism are also interesting because these are examples where you guys helped create the categories.
0:41:29 Where I believe you’re the first big venture firm to have dedicated crypto and AD practices.
0:41:37 You’re also creating a firm and you’ve created a firm that is, can be adaptive to new sort of theses, new ideas, new, new, new trends and build firms against them.
0:41:38 Yeah.
0:41:47 And that was something, you know, like I just say that Mark kind of identified early on, you know, he, one of the things he used to say when we started the firm is venture capital is a young man’s game.
0:41:52 And that’s because a venture capitalist, that was like one of the things he got out of the many conversations we had with him.
0:42:00 He’s like, and what he was really saying is a young person’s game is, you know, the technology is always changing.
0:42:07 And, you know, to learn and the people who know the new technology best turn out to be often new people.
0:42:14 And so to what you see in many venture capital firms is once whatever they exploited runs out.
0:42:19 So they did network effects and consumer internet, and they were amazing at that.
0:42:23 But then when that stopped being the thing, they didn’t get to the next thing.
0:42:26 And we were able to get to the next.
0:42:28 So, you know, one, we’re always watching for the next thing.
0:42:36 But then as soon as we see it, like, and we have such brilliant people, you know, Chris Dixon saw crypto, and we’re like, Chris, go get it.
0:42:42 And, you know, David Yulevich actually saw Catherine Boyle, who saw American Dynamism.
0:42:44 And Catherine was like, like, this is a very important thing.
0:42:46 And so we just go do it.
0:42:51 And we can do it because we don’t have to repurpose our old people.
0:42:52 We can build a whole new team.
0:42:54 We can change the organizational structure.
0:43:05 In an offline conversation, we were talking about how some firms look the same as they did, you know, 30 years ago from a structure perspective.
0:43:07 And the world has changed.
0:43:13 And, you know, firms need to change to meet those sort of the evolving needs.
0:43:18 And this is one example where the sort of stuff has gotten so much more complex.
0:43:20 There’s been this great complexification.
0:43:32 And so to your point, a generalist firm could have been able to cover the entire landscape, but now no, you know, individual can have deep knowledge on all the fields, you know, bio, crypto, all the fields we cover.
0:43:40 And so that’s one great example of how the world has changed and that leads to a need in venture firms to change as well.
0:43:50 Are there other examples that come to mind around how the asset class has evolved or should have evolved to meet the needs of the world changing?
0:43:57 Well, you know, it’s probably changed more since we started the firm than it did in the whole history before then.
0:43:58 And there’s so many ways.
0:44:06 So, you know, one of the things is, right, like as Mark said earlier, angel investing, kind of that became a real category.
0:44:21 And then the public markets have become, I would say, very difficult and dysfunctional to the extent that, you know, OpenAI just did a giant raise in the private markets, which I don’t think they could have done in the public markets.
0:44:38 So now, like the fact that you can raise more money in the private markets than the public markets in one shot just has speaks to the expansion of the private markets to deal with the fact that the public markets are just not a great environment anymore for, you know, for companies.
0:44:41 And so that changes venture capital because we’re the private market.
0:44:44 So our market just, you know, got much more enormous.
0:44:50 And then, you know, as you said, like media change, like how you go to market.
0:44:54 Like we actually were the first ones to market a firm in venture capital.
0:45:05 And, you know, Margaret Wett and Marcus did like an amazing job of, you know, creating a brand for a firm that, you know, popped up out of nowhere.
0:45:07 And that had never happened before.
0:45:10 But then the way you market it changed entirely, as we just discussed.
0:45:12 So, you know, it’s evolving.
0:45:14 The world is changing really fast just in general.
0:45:26 And now, look, I think AI, just the way we work, the way we operate as a firm is changing very fast due to AI and, you know, like what we can automate, you know, how big a reach, how many entrepreneurs we can know.
0:45:27 All these things are very different now.
0:45:36 Let’s double click on the brand point because you guys in 2009, you came out and you were alluding to it earlier, but you made a lot of noise, right?
0:45:39 You know, some people have different opinions, but everyone had an opinion.
0:45:44 And you thought deliberately about, hey, we’re going to build a brand in a new way, you guys and market and team.
0:45:46 And you kind of crushed it.
0:45:53 Talk about what that strategy was and what perception it was and what was it like as you were building out the brand?
0:46:00 Well, look, you know, it was a conversation Mark and I had, and, you know, Mark is kind of like one of the ways we understand each other.
0:46:07 So, Mark asked me, he said, you know, like, I’ve been studying the history of venture capital.
0:46:10 I’ve been trying to figure out why they don’t do any marketing.
0:46:21 And it turns out, like, the industrialists and venture capitalists, the Rothschilds, you know, J.P. Morgans and so forth, were sometimes, like, funding both sides of a war.
0:46:26 And so, like, any kind of publicity, like, might get them killed.
0:46:37 And that just kind of carried through to modern venture capital so that the original rationale for not doing it was no longer really valid.
0:46:46 And they told themselves other things, like, we’re very humble, so we don’t market and this kind of nonsense, which is always a rationalization for laziness.
0:46:48 So, he said, you know, like, what do you think?
0:46:48 Should we market it?
0:46:56 And, you know, like, sometimes when Mark asks a question like that, and I already know what he thinks and I haven’t thought about it that much, I just go, yeah, of course, like, let’s market it.
0:46:57 And that was kind of that conversation.
0:47:07 And then, you know, he had worked with Margaret, you know, prior at Ning, and he thought super highly of her.
0:47:13 And so, what happened is, you know, he said, well, let’s, you know, let’s talk to Margaret.
0:47:14 Let’s see what we can do and so forth.
0:47:20 And, you know, we spoke to her and this was kind of a hilarious thing.
0:47:25 And you have to remember that this is the days when, like, magazines were a big deal, which, you know, they’re not so much anymore.
0:47:34 And so, when we launched the firm, she said to us, she said, do you want to be on the cover of Fortune or Forbes?
0:47:36 And we were like, Fortune, of course.
0:47:39 And that’s exactly what happened.
0:47:41 So, that was the beginning of it.
0:47:46 And you guys were able to recruit amazing people early on.
0:47:49 Talk about what it was like to get one of the first big partners.
0:47:55 Like, you know, you’ve got some partners like Chris who’ve been here, you know, over 12 years.
0:48:00 What was it like in terms of how you thought about recruiting the early partners and landing them?
0:48:06 I would say that’s, like, kind of one of the things we got wrong in our thinking.
0:48:08 Well, we got right and we got wrong.
0:48:15 So, like, one of the things we got very right was the first person we hired was Scott Cooper, who we knew, like, super well and had worked with for years.
0:48:20 And it was just like a brilliant, like, and really fundamental to building the firm.
0:48:25 He’s recently joined the presidential administration in the White House.
0:48:29 But he was just kind of invaluable and fantastic.
0:48:35 And he didn’t want to join when we started the firm because he was worried we wouldn’t be able to raise the fund.
0:48:37 So, we raised the fund and then we hired him.
0:48:39 He was employee number one.
0:48:48 Then the second idea that we had was to kind of only founders or CEOs were allowed to be general partners.
0:49:01 And the reason for that was, you know, a little bit what Mark said earlier, which was we were counter-programming what had happened in the industry where you had a lot of people who were smart but didn’t understand founders.
0:49:04 So, we wanted everybody in the firm to understand founders.
0:49:09 But that profile turned out to be not perfect in many ways.
0:49:11 But we hired some really great people.
0:49:16 You know, one of the early people is Peter Levine, who still works with us now and so forth.
0:49:25 And then, you know, we kind of started, the first thing we relaxed was, okay, maybe the company, you had to found a company or BCO, but it didn’t have to be that great a company.
0:49:28 Like, if the company did okay, then that was okay.
0:49:33 And that kind of gave us permission, which was controversial at the time, to hire Chris Dixon.
0:49:40 And one of the things Mark and I recognized early was Chris Dixon was a far better investor than either of us.
0:49:46 And so, that was like a little bit of an indication that maybe we were too rigid in our criteria.
0:49:48 And that started to open it up quite a bit.
0:49:57 I want to go back to one of the unique insights you had was going back to, you know, Mark’s software’s eating the world piece was that there were going to be more winners.
0:50:00 And those winners were going to be much bigger.
0:50:03 And there’s a lot of implications that stem from that.
0:50:05 You’ll raise bigger funds.
0:50:10 You’ll have this decentralized team or sort of federated model.
0:50:17 You’ll have, you’ll be able to invest at higher valuations if these companies are going to get bigger and bigger.
0:50:28 And it feels like that was something that you guys saw relatively early that, you know, other people, other firms or even later stage firms, you know, then sort of got on, got on board with.
0:50:41 Yeah, so, so the big thing on that is, you know, sort of this really important transformation that’s happened in tech that sort of went kind of unremarked on as a pattern, although you started to see it kind of in the early 2010s, which is, you know, kind of up until roughly 2010.
0:50:49 Like if you make a list of all the big winners in tech over the preceding 60 years, they were basically all a form of a tool company, you know, technology tool.
0:50:55 So, you know, they would build personal computers or microchips or operating systems or databases or routers or web browsers or whatever.
0:50:59 But fundamentally, they were, you know, building components of a computer system.
0:51:03 And then, you know, they would sell, you know, those tools to either consumers or businesses.
0:51:06 And then the consumer or business would figure out what to do with the tools.
0:51:08 And that had been the pattern.
0:51:23 In fact, Ben will recall when he first started the firm, one of my early investing things was no verticals because you just look at that list and you’re like, basically, the big winners have all been these big horizontal tech companies building general purpose tools that lots of, you know, that many other, many, many, many downstream industries pick up and use.
0:51:30 But, you know, the big winners, like historically, if you had a tech startup that was focused on a vertical, it just meant that you were a small tools company.
0:51:42 The classic example. So classic example is I am a tech company and I want to be in the boutique hospitality industry, you know, and so therefore I start a software company that makes, you know, booking software for bed and breakfast hotels.
0:51:46 And, you know, such things existed, by the way, and they were just like very tiny companies.
0:51:51 Fast forward to 2010, you have this like basically, and I think it’s really the Internet really started to work.
0:51:55 Broadband really kicked in, you know, a bunch of things, you know, kind of really catalyzed.
0:52:00 And what you started to see was actually the vertical, the tech companies that went into vertical started to get to be huge.
0:52:06 And probably the first two of those, you know, that really, you know, kind of made this clear for me were, you know, Uber and Airbnb, right?
0:52:13 Where, you know, Airbnb, okay, like, how about we not only build the booking software for the bed and breakfast, but how about like we run the entire service?
0:52:16 Like, how about we run the entire booking engine? How about we run the entire search engine?
0:52:21 How about we do all the transactions? How about we do all the customer, you know, all the customer service, like the entire end to end experience?
0:52:35 Or the same thing for, you know, Uber or Uber and Lyft, which is, you know, you could have a small boutique software company doing taxi dispatch software for taxi limo operators, or you could build Uber or Lyft and build, actually build a giant transportation network with, you know, drivers and riders and money flowing through.
0:52:48 And then, you know, more recently, you could, you know, a company like Andrel, right? Like, you know, our companies for many years have sold many, many, you know, parts of computers and software into the defense department and into the defense contractors.
0:52:56 But, you know, Palmer Luckey came along and said, let’s just build a defense contractor. Like, let’s build a direct competitor to the big defense primes and actually, you know, build defense systems.
0:53:05 You know, Tesla, another one, right? Like, you know, instead of building, you know, embedded, you know, whatever power management software for, you know, for cars, you know, how about just like build the car?
0:53:13 You know, SpaceX, we keep going. But basically, like in the last 15 years, if you write that, if you do that same list again, you know, many or most of the big winners have been companies that have gone into a vertical.
0:53:26 But what they’ve done is they’ve gone in and they’ve tried to basically eat the entire vertical, right? They’ve provided an end-to-end experience with everything required to basically, you know, service that vertical, often in direct competition with the incumbents in that vertical, right?
0:53:35 So Andrel competes head-to-head with existing defense primes, you know, Uber competes, you know, competed head-to-head with tax limo operators, Airbnb famously competed head-to-head with hotels.
0:53:42 We got extremely angry about that, right? And so, you know, Netflix competed directly with cable channels, right? And movie theaters.
0:53:50 And so basically, it’s just like, all right, you’re going to have more and more of these companies that are going to use technology to go insert into an end market and then just try to go take that end market.
0:53:54 Those companies, good news, those companies can get to be gigantic, right?
0:54:06 Because if you crack the mother load, like, you know, Netflix has, for example, entertainment, you know, or like Tesla has in cars, you can build a company that’s maybe multiples in size, even of that entire industry earlier, you know, the way that existed before.
0:54:10 The challenge is that those kinds of companies are much different than historical tech companies.
0:54:14 Those are like full service. And so they’re like much more complex, right?
0:54:17 They have like a lot more moving parts on the operating side.
0:54:19 They require a different kind of discipline on the part of the management team.
0:54:26 You know, they’re going to be operating in a lot of cases, they’re operating in regulated industries, right, where there’s a completely different political dynamic.
0:54:32 And by the way, they’re going up against entrenched competitors, right, who certainly have no intention of just turning the business over.
0:54:42 And so I think in many ways, that’s been the defining theme of the last 15 years in the Valley is kind of the evolution from just tools companies to, you know, what we used to call full stack, like just do the whole thing.
0:54:53 It’s fascinating. The one knock against injuries that I’ve heard over the years is, hey, it’s, you know, they think of their firm as a product or there’s like a, there’s like a machine as if, as if that’s not, you know, a great thing.
0:55:03 Like if a startup said, hey, we have no moat, you know, I’m just a smart guy, you’d say, hey, that doesn’t, doesn’t feel super defensible, doesn’t feel like you’ve really built something of power.
0:55:10 And yet, sort of when people think about their venture firms, they sort of run them the opposite of ways that they want their startups to run.
0:55:17 They really think about structural advantages or durable advantages or network effects or all of these things that they want their startups to have.
0:55:19 It’s been an interesting sort of contrast there.
0:55:27 There’s a kernel of truth in the critique. The kernel of truth is like, look, at the, at the end of the day, as an entrepreneur, you do, you do, like your VC, you don’t have personal touch.
0:55:29 And the reason for that is you’re going to have somebody on your board, right?
0:55:34 Like you’re going to have somebody on your board. You’re going to have somebody you call at 4 a.m. when like, you know, the world is caving in.
0:55:36 You’re going to have somebody who you, you’re, you know, you’re dealing with.
0:55:41 And, and that’s going to be, you know, and it’s going to be, you’re going to be dealing with that person in high tension situations.
0:55:43 You’re going to want to really rely on them. You’re going to want them to really know what they’re talking about.
0:55:46 You’re going to want them to, you know, have, have throw weight in the industry.
0:55:51 And so you’re like that, that really, that does really matter. There, there is that personal relationship.
0:55:55 And so I, I, I don’t think what would work is just like trying to not provide that.
0:55:58 And instead just, just provide, as you said, like, just provide a machine.
0:56:02 But what I think works incredibly well is to provide that and provide the machine.
0:56:05 Well, and, and the team.
0:56:15 So the thing that I would say really distinguishes kind of what we do from, from what we experienced is like, we always had a person.
0:56:20 And when we tried to reach through that person to the rest of the team, they were like, not my company.
0:56:22 I’m not making that introduction. I’m not doing that.
0:56:30 Whereas, you know, like almost on a daily basis, you know, we’ll have a company who’ll run into something and they’ll go, oh, wow.
0:56:31 You know, yeah.
0:56:33 Like you should talk to Joe Morrissey.
0:56:35 He dealt with that sales issue over here.
0:56:36 You should talk to Ben.
0:56:40 Like he knows how to like deal with a crisis like this.
0:56:53 In fact, we just had one this week, you know, where, you know, one of our partners, he’s like, well, this is seems like a bad crisis, you know, like bringing, bringing the guy who like lived through all the crises.
0:57:00 And, you know, that’s me and like, I can really help in that because I, I know I understand like what to do, but I understand what it feels like.
0:57:06 And, you know, so much of, you know, that kind of thing is, is, is having a deep understanding.
0:57:10 And in the firm, we understand almost every situation you would be in.
0:57:18 And there’s somebody who’s a great expert who will be there in like a flash, even if that’s not the person on your board.
0:57:26 And that, that I think is probably the thing I’m most proud of in the organization is people always get their money’s worth from that perspective.
0:57:31 This is the big industry structural transformation thing that we think has taken place.
0:57:36 And we, we, we did, and this is one where we did predict that we have been talking about it for a long time, but I think it’s really happened.
0:57:41 Like it’s really played out over the last 15 years and it’s still playing out, which is there’s this pattern.
0:57:48 There’s this pattern in industries as they mature, which is they often start with what you would call like basically a strategy that’s kind of like being in the middle.
0:57:57 So classic example using this is like retail, you know, retail shopping where, you know, once upon a time there were these things called department stores, you know, it’s just names like Sears and JCPenney.
0:58:01 And then you would go to the department store and the thing about the department store is it would have a pretty good selection of products at a pretty good price.
0:58:04 And, and, you know, growing up, that’s, you know, that’s where we would always go shopping.
0:58:08 You know, by the time you hit the eighties and nineties, you know, basically the department stores stopped working.
0:58:11 And, and, you know, for the most part, they’ve gone under at this point.
0:58:18 And, and what happened was they got replaced by competitors that were not in the middle, but were on the far, the far end of one side or the other of kind of the spectrum of strategies.
0:58:20 That’s why we call the outcome of the barbell.
0:58:23 And so the department store was replaced by two, two sets of companies.
0:58:26 So first of all, high scale, right?
0:58:28 So high scale, Amazon, Walmart, right?
0:58:32 Where, where, where, where what you get is like an incredible selection at absolutely fantastic prices.
0:58:33 Right.
0:58:36 But, but, but it’s a very, you know, to your point, like, it’s a very machine experience.
0:58:37 It’s a very, it’s a very machine.
0:58:40 It’s a very, you know, it’s a, you know, it’s a high scale.
0:58:44 You go to Walmart and like, you know, the shelves up to the ceiling and the whole thing, like, you know, it’s, it’s a specific thing.
0:58:47 But like that, like wiped out a huge part of the department stores.
0:58:59 And then the other thing on the other side was basically specialist boutiques, where for the thing that you care about the most, whether that’s, you know, fashion or jewelry or consumer electronics or candles or whatever, right?
0:59:03 Whatever is the thing that you actually care about the most, you go to the boutique, right?
0:59:07 And you say, I was talking about it, you go to the Gucci store, you know, to buy your scarf, you go to the Apple store to buy your iPhone.
0:59:11 And what the boutique offers is a very narrow selection at a very high price.
0:59:13 But what you’re getting is a very specialized experience.
0:59:16 And your point, you’re often getting the personal touch, right?
0:59:20 So you go into a, I don’t know, you go into like a, you know, wrist press boutique or something.
0:59:21 And it’s just like, it’s just like, great.
0:59:23 It’s like, wow, would you like some champagne?
0:59:24 You know, we’re doing the whole thing.
0:59:25 Oh, let me get you a comfortable chair.
0:59:27 It’s like, you know, here’s all the espresso.
0:59:29 You know, it’s just like the whole thing.
0:59:29 Oh, you want to stay late?
0:59:30 Great.
0:59:30 We’ll lock the doors.
0:59:32 You can stay for another, you know, half hour and browse through everything.
0:59:38 You know, you just get, you get this very, you know, you get this very, you know, kind of personal touch, you know, personal touch kind of experience.
0:59:41 And so what happened was the department stores just died because they didn’t offer either one.
0:59:46 They didn’t offer scale and they didn’t offer the boutique personal touch experience.
0:59:52 And what you find if you look at the history of business is basically as industries professionalize and mature, many of them go through this.
0:59:56 And so what I’m describing also happened in advertising agencies.
1:00:02 By the way, this is a big theme of the TV show Mad Men because they were right in the middle of, you know, if I remember there’s a certain point in the show where they sell, you know,
1:00:07 they’re running this kind of midsize ad agency and then they actually sell it to McCann, which was one of the big scale players.
1:00:09 And then they got frustrated there because it was just a big machine.
1:00:11 And so then they went and started their own boutique.
1:00:14 And so it was kind of, kind of during that, during that, during that era.
1:00:16 And then it’s ad agencies, it happened to law firms.
1:00:18 It happened with Hollywood talent agencies.
1:00:22 Michael Ovitz catalyzed this when he was in Hollywood in the 70s and 80s.
1:00:24 It happened in the financial, it happened in banks.
1:00:26 It happened in investment banking, commercial banking.
1:00:27 It happened in hedge funds.
1:00:28 It happened in private equity.
1:00:34 So we just like seen this pattern that this happens over and over again, but it hadn’t happened in venture capital.
1:00:40 And so when we entered the field, basically what we observed was you just basically have, they’re all department stores.
1:00:50 And the venture capital version of the department store is six to eight general partners with a, you know, 300, 400, $500 million fund, you know, doing the sushi boat strategy, right?
1:00:53 Like sitting and waiting, you know, not, you know, by the way, you know, no website, right?
1:00:58 Because like, oh, you know, God forbid that you like, you know, ever tell your story to anybody or make yourself visible.
1:01:01 And then you just, you basically sit on a sandhill road and you basically wait for the deals to come through.
1:01:04 And then, you know, it had run that way for a long time.
1:01:06 And so it was kind of this cartel self-referential thing.
1:01:09 And so it just, it just kind of ran that way.
1:01:21 And basically our bet when we went for scale and we went to build out the kind of teams that Ben described and sort of this machine that results from it, you know, the bet was basically that the death of the middle was going to happen.
1:01:22 The barbell was going to play out.
1:01:29 And so there was going to be an opportunity for a handful of firms to go for high scale, but only a handful, right?
1:01:32 Because what you get on the other side of this is you don’t get 50 at high scale.
1:01:34 You get, you know, you get a bunch, but like it’s not that many.
1:01:36 It was a scale economics kick in.
1:01:41 And then what would happen on the other side is the rise of the seed, their angel investor and the seed investor.
1:01:42 And of course, we had been part of that, right?
1:01:43 We had been on that side of the barbell.
1:01:51 And this was part of the transformation that had happened in venture, which is the original venture firms were like the original venture firms in the 50s, 60s, 70s.
1:01:52 They were first money in, right?
1:01:54 They were the first check, right?
1:01:55 A company like Intel or Apple.
1:01:59 By the time the 80s and 90s rolled around, they were no longer the first money in.
1:02:02 They were often the second or third check after the angels and the seed investors.
1:02:08 And so, you know, we put two and two together and said, aha, what’s going to happen is this field is going to bifurcate just like every other field.
1:02:11 We’re going to go for scale and then we’re going to encourage the seed investors.
1:02:15 And I’ve been, you know, we’ve been very actively trying to invest in seed investors and trying to help them.
1:02:16 And, you know, I was trying to be very friendly with them.
1:02:22 And then basically the question, the structural questions posed is what’s the point of having a department store, right?
1:02:24 Of having a sort of mid-sized firm.
1:02:26 And the answer is, by the way, there’s no point.
1:02:28 Like for the same reason there’s no point to department store.
1:02:34 There’s no point to the mid-sized firm for the reason that Ben described, which is that, you know, they don’t have any – they’re not the first money in.
1:02:36 They’re not at scale.
1:02:37 They don’t have any depth.
1:02:45 And so at the end of the day, there’s really fundamentally no value proposition to the thing if you have access to seed investors on the one side and the scale platforms on the other side.
1:02:51 And I would say, you know, 10 or 15 years ago we would say this and everybody would get mad, you know, because it sounds like we’re predicting everybody’s going to die.
1:02:54 But like sitting here today, you know, this has really played out.
1:02:59 And many of the mid-sized firms that I grew up with are gone.
1:03:02 And in some cases, they’re gone because they failed.
1:03:04 But in a lot of cases, they’re actually gone because they succeeded.
1:03:06 You know, the partners made a lot of money.
1:03:09 And then at some point, just the rationale for being in business started to fade away.
1:03:12 And, you know, maybe they had to start working a little bit harder and that wasn’t fun.
1:03:14 And so they just kind of folded up shop.
1:03:17 And then the LPs correspondingly have adapted to this.
1:03:26 And so if you talk to the LPs now, increasingly, they are focusing capital either on the scale platforms or they’re focusing capital into, you know, this very specific kind of early stage seed angel strategy.
1:03:30 And their interest in funding the department of store equivalent of the VCs, you know, has really faded.
1:03:35 Anyway, so I view this as like, like, this is one of those things, like, this is a very natural evolution.
1:03:36 This was destined to happen.
1:03:38 It’ll happen in many other industries in the future.
1:03:44 You know, it’s a somewhat, you know, it’s a process that plays out in response to customer demand, right?
1:03:48 Because the customers of venture firms are the entrepreneurs on the one hand and the LPs on the other hand.
1:03:50 And if they both want this change to happen, then it’s going to happen.
1:03:52 And so it’s a very natural process.
1:03:55 But, you know, it’s disconcerting to be on the wrong side of this.
1:03:59 And it’s an adaptation process for people to kind of figure out that this is happening.
1:04:00 But I think now it’s pretty clear.
1:04:03 That’s well said.
1:04:06 And that’s one example of how the asset class has evolved.
1:04:08 Let’s get into other ones.
1:04:14 I mean, one is that there’s been, you know, as your thesis has played true, software has eaten the world.
1:04:18 There’s been more demand on the LP side to get into the space.
1:04:22 Much more money has flooded into space, which means more venture capital firms, which means more competition.
1:04:34 And of course, when, when supply is constrained, people are sort of competing on the axis of almost, you know, VCs have the power and founders are clamoring to, to get into, to be on the conveyor belt.
1:04:37 And they’re, you know, pretending not to care by, you know, not having websites.
1:04:45 But when there’s an explosion of venture firms, now founders are the ones picking and VC firms have to change their tune.
1:04:50 You guys were, were early on to it, but it also changes sort of the, the, the types of LPs that want to be involved.
1:04:58 And then, yeah, talk more about how, how, how the asset class has evolved from, from more capital flooding into the space or any other changes that emerged from it.
1:04:59 Yeah.
1:05:00 So look, I was like a couple of things.
1:05:09 So first of all, our, our, our, we used to have this discussion with our friend, Andy Ratcliffe, you know, who’s kind of the master of a venture and, you know, as I said, co-founder of a benchmark and then actually taught venture later at, at, at Stanford.
1:05:11 And very analytical on the topic.
1:05:12 Yeah.
1:05:13 Extremely thoughtful.
1:05:18 And, you know, cause we have this discussion with him of like, wow, you know, money comes in and out of the, you know, money comes whipping in and out of venture and these, right.
1:05:25 These dynamics really change of who’s, as they say in Seinfeld, who has hand, you know, in every relationship, somebody, somebody has hand, you know, the upper hand.
1:05:28 And is it the founders or the, or the, or the VCs?
1:05:29 And he said, you know, how, how should we think about this?
1:05:31 And Andy made this very interesting observation.
1:05:40 He said, basically for as long as he had been in the field, I think, you know, going back, you know, going back now decades, you know, he said, basically venture has always been over, over, overfunded as an asset class.
1:05:44 There’s really never been a time in which vendor has, venture has been underfunded.
1:05:49 Maybe, maybe a little bit in the extreme crises, like, you know, maybe 2009 as an example, but like generally venture is overfunded.
1:05:55 He said, he has rough, I think he said at the time, his rough back of the envelope math is a sort of roughly always overfunded by like a factor of four.
1:06:00 You know, I think you, you know, maybe these days it’s like a factor of 40 or 400 or something.
1:06:03 You know, the Sequoia guys are always famous for complaining.
1:06:06 Anytime Sequoia guys give an interview, they always talk about how there’s just like way too much money in venture.
1:06:08 As they’re always trying to talk to LPs.
1:06:11 Yeah, they’re always trying to discourage people from doing any venture, yeah.
1:06:18 Yeah, they’re trying to talk to LPs into stopping the money flow, but, because, you know, more competition, but, but, but then his question is, okay, why is it always overfunded?
1:06:24 And, and, and he said, basically, it’s, it’s a consequence of the, you think about the broader financial landscape.
1:06:26 So, you know, what, what are LPs?
1:06:33 LPs are large pools of institutional capital being invested for many reasons, but a lot of it ultimately is retirement, they’re ultimately retirement funds.
1:06:36 Like the ultimate theme is one form or another, they’re retirement funds.
1:06:43 So, so they’re large pools of capital that need to generate a certain level of return over the next 50 or 100 years to be able to pay for, you know, people’s retirement.
1:06:47 And, you know, in order to do that, they need to hit a certain level of return.
1:06:50 And, you know, the nature of, of the modern economy is, you know, population declined.
1:06:53 You have a lot more older people, a lot fewer younger people.
1:07:03 And so you have this sort of fundamental issue, which is like how, as a steward of institutional capital, how do you generate the long-term returns that you need in an environment in which actually that’s, that’s actually not so easy.
1:07:09 And so, you know, you invest in stocks and bonds and whatever, and, and, and, you know, you often still can’t get the math to pencil out.
1:07:10 You’re not going to hit your return target.
1:07:15 And then there’s this asset class called venture capital where, you know, sometimes it works and sometimes it doesn’t.
1:07:17 But when it works, it blows the lights out, right?
1:07:20 Like when venture capital works, it’s the top performing asset class.
1:07:28 And, you know, there are individual venture capital funds that have been, you know, just absolutely spectacular, you know, returns that have driven a lot of the return for an entire institutional portfolio.
1:07:37 And so there’s this, you know, and the way I describe it is, you know, venture capital is never the majority of the money in an institutional pool, but it’s like the, you know, it’s like the cherry on the top of the sundae.
1:07:43 It’s the thing that, you know, it’s the, it’s the, it’s the small position of the thing, but if it works, it might make the entire formula work.
1:07:49 And then you just look at like how many, how many pools of capital are there like that out there, right?
1:07:51 How many, how many LPs are there out there like that?
1:07:52 And the answer is there’s a lot.
1:08:00 And then basically what happens is all the LPs basically read the Swenson book, which describes how to run, you know, these institutional capital pools, which is a great book.
1:08:09 And they basically say, oh, Dave Swenson says you put, you know, X percent of venture capital and, you know, but Dave Swenson says the key to it is you only invest in the top venture capital firms.
1:08:13 Because venture capital is a feast or famine business and you only want to be in the top 10 percentile of firms.
1:08:20 And then basically what they do is they go out and they talk to, you know, the firms and then they find out they basically can’t get into most of the firms they want to invest in.
1:08:23 And then they sort of develop a theory of how these other firms are actually in the top 10 percent.
1:08:30 And you can actually pick that up because if you ask LPs who are their top, who do they think are the top 10 percent firms, they often have very different lists.
1:08:34 And, and, and I, and I, you know, and part of it is a function of maybe they’ve, they’ve, they’ve sniffed something out.
1:08:37 And a part of it is just because like they have to allocate the money.
1:08:40 And so they kind of convince themselves that there, there are sort of undiscovered gems out there.
1:08:44 And so as a result, they just, they, they just, they overfund the asset class.
1:08:47 And then that, that, you know, it’s just like too many LPs leads, right.
1:08:59 Too many LPs managing too much money leads to too many VCs, leads to too many startups getting funded, which leads to the phenomenon that founders experience, which is I start a company and not only do I have three venture competitors, I often have 30.
1:09:00 Right.
1:09:02 And it’s like, you know, basically like what the hell.
1:09:06 And so anyway, so Andy’s point is like, look, like that’s just an artifact of the world.
1:09:12 Like we, we are the, we are the tail on a much larger dog and the dog is large scale institutional money flows.
1:09:19 Like venture is a rounding error in the global financial system, but it’s one that’s just prone to be overfunded for very long periods of time.
1:09:29 And what, what Andy said was until there’s a new approach to investing these large pools of capital, like basically this, we should basically assume that this, this, this, this process persists over a long period of time.
1:09:36 So, so I think it just is, is the case, you know, would it be better if the amount of money was kind of, you know, equalized to what it should be relative to the opportunity set?
1:09:38 I mean, you know, for people like us, yes, that would be better.
1:09:40 For the world, it would be worse.
1:09:41 Yeah.
1:09:42 I was going to say, yeah.
1:09:43 So that’s the other thing.
1:09:47 It’s like, if you had less money in the space, would, would you, would entrepreneurs be able to take as many swings?
1:09:47 No.
1:09:48 Right.
1:09:55 And, and, and, you know, look, you know, should I have the arrogance to sit here and say that we’re going to invest in all the great companies and that we’re not going to say no to people who we ought to be funding?
1:09:58 And obviously we, you know, we make that mistake all the time.
1:10:03 And so like, if you’re going to have an asset class that is to be overfunded, like this probably is the one to overfund, right?
1:10:10 In other words, that there’s a societal surplus of, of all of the swings that entrepreneurs get to take that they wouldn’t get to take if the sector wasn’t overfunded.
1:10:12 And some of those work, right?
1:10:16 Like, and you have founders come out of nowhere and they raise money from no-name VCs and like they end up building huge successful companies.
1:10:26 And so I, on a societal basis, I actually think it’s this, it’s like, it’s, it’s, it’s like a form of dysfunction that maybe is not optimal financially, but like on a societal basis, I think it’s probably not positive.
1:10:38 Yeah. I mean, like what could be better in terms of wasting money than taking money from people who have too much and giving it to people who want to change the world and make it a better place?
1:10:45 I mean, it seems like a, you know, and our, and our building a company to do so like that, but that seems like a pretty good idea.
1:10:58 You know, the other thing I’d add to that is venture capital is a little bit unique, you know, from our point of view in that it’s the only asset class where the top managers tend to persist for decades.
1:11:10 So like, if you look at stocks or bonds or anything else, like the pickers, because they’re all, you know, kind of picking against the same thing and they all have equal rights to invest in everything.
1:11:18 It tends to like, there’s some amount of randomness or, or whatever that puts somebody on top and then they’re no longer on top the next decade and so forth.
1:11:24 But in venture capital, the top firms often remain the top firms for a very, very long time.
1:11:29 And the reason is the best entrepreneurs will only take money from the best venture capital firms.
1:11:39 And so, you know, if this was the NFL draft, which I think is today, you know, we’d have the number one draft pick every single year, despite already kind of having the best team.
1:11:43 And so that doesn’t matter if there’s too much money.
1:11:47 If you always get to pick first, you still can win very consistently.
1:11:49 And that, that’s sort of what happens.
1:11:52 So, so it’s a great system from our perspective.
1:11:53 Good for the world.
1:11:53 Good for us.
1:11:54 We love it.
1:11:54 Yeah.
1:12:03 Some people will say things like, oh, there’s too many founders or too many people want to be founders as if it’s like a already an efficient market.
1:12:05 And there aren’t people out there in the world who whom.
1:12:06 That’s a bit.
1:12:11 Yeah, it’s the best thing in the world for like people to try, you know, to do something larger than yourself.
1:12:16 And try and make the world a better place and, you know, get people along the ride with you.
1:12:19 And everybody’s got a great purpose and they’re all working hard.
1:12:23 And like, and maybe there’s a great outcome for them in the world.
1:12:27 Like, why wouldn’t you want to fund as much of that as you can?
1:12:30 Like, it’s, I never understood the argument that there’s too much venture capital.
1:12:31 Yeah, it’s crazy.
1:12:33 It can never be too much.
1:12:40 When did you guys realize that you were entering the, like, when did you realize, hey, this is really working?
1:12:47 Like, what was sort of the biggest inflection point in AC’s history of when you guys felt you reached that point?
1:13:00 So, like, very early on, we realized we could win what we thought were very high quality A rounds from, like, our, from top tier VCs.
1:13:06 And as soon as we could do that, we were like, oh, we could be top tier.
1:13:08 We could definitely be top tier.
1:13:15 We thought, you know, in our original, like, kind of world domination plan, we thought, you know, that was going to take 10 years or whatever.
1:13:18 But it happened really early on, like, right in fund one.
1:13:23 And by the time we got to fund three, it was in full effect.
1:13:27 So, it just happened much faster.
1:13:30 Now, like, we’re in a whole other world now than we were then.
1:13:41 But we knew it was, like, as soon as we could beat, you know, in those days, Kleiner, Benchmark, or Sequoia in a deal, that was a very clear indication that we could be top tier.
1:13:51 Yeah, look, I think it was basically, you know, this is sort of the advice I’d give people, not how to compete in venture, but how to compete in other spaces that are potentially right for transformation.
1:13:53 It’s really, it’s two things we were able to do.
1:13:54 I think it’s two things.
1:13:58 One is just, like, having been a customer, you just have a perspective on these things.
1:14:04 And so, there is a real, there is a real knowledge advantage if you’ve been a customer or something, you’re really understanding the shortfalls and the opportunities.
1:14:05 So, that’s one lens.
1:14:07 But you actually have, you know, you have to do that.
1:14:07 Like, I think.
1:14:11 Yeah, that was a hell of a hard lesson that we had to learn that way.
1:14:12 It was.
1:14:15 Building a company is a lot of knowledge gathering.
1:14:19 Yes, 15 years, 15 years of pain and glory.
1:14:25 And then, yeah, look, the other thing is, you know, we’ve been talking about this the whole discussion, but the other thing is, you know, to take a structural view of the industry, right?
1:14:32 Which is like, you know, as we talked about before, but like, these industries are not, the structures are not permanent and timeless.
1:14:36 Like, you know, just because things work a certain way today doesn’t mean that’s how they’ve always worked.
1:14:37 In fact, almost certainly that’s not the case.
1:14:42 Almost certainly the structure of any industry has changed a lot over time as circumstances have changed.
1:14:48 And then, therefore, the structure of whatever industry is today is not going to be the same structure it’s going to have in 10 or 20 or 30 years.
1:14:56 But incumbents, especially incumbents that no longer have their founders, incumbents are highly likely to underestimate the amount of structural change and they’re going to have a hard time adapting to it.
1:15:03 And so, if you adopt a structural approach, you can kind of get a, you know, you can get a little bit of a crystal ball, you know, and then combine that with the customer mindset.
1:15:07 You can kind of look at a little bit of the crystal ball and say, okay, well, I’m going to, you know, it’s going to kind of change this way.
1:15:13 And then it’s the gap between the way that the incumbents are currently doing it and the future way that it ought to work.
1:15:15 I mean, that’s where you have the insertion opportunity.
1:15:21 There’s a related quote to this, Mark, in a New Yorker profile on you many years ago.
1:15:28 There’s this quote that says, Mark Andreessen sometimes wonders if Naval Ravikant is onto something, the founder of AngelList.
1:15:33 He’s asked Horowitz, what if we’re the most evolved dinosaur and Naval is a bird?
1:15:38 So this was in, this was in the middle we call, this is in the heyday of AngelList.
1:15:39 That was a good question.
1:15:40 Yes.
1:15:45 Well, so first of all, it’s a, it’s a question that’s totally ruined because we now know that the dinosaurs were birds.
1:15:55 So that, you know, T-Rex is running around with feathers and a beak, which my, you know, my, my 12 year old self is deeply disappointed by, you know, Jurassic Park, you know, the next Jurassic Park reboot is going to be very sad and depressing.
1:16:11 But, but, you know, the, the specific point when I, you know, when I, when I said that, whatever, a decade ago, Ben will recall it was when AngelList was kind of, you know, right in the, you know, basically AngelList was aspiring to basically structurally replace venture the way that we were doing it by having it be a, you know, essentially a marketplace, an online marketplace approach.
1:16:14 And so that, you know, that was one, you know, kind of disruptive opportunity.
1:16:18 And, you know, by the way, crowdfunding, you know, there’s, there’s a bunch of these and, you know, there, there are cases where that’s worked really well.
1:16:21 So that, that, that’s one form of structural change.
1:16:28 The other form of structural change, of course, is like, okay, you know, AI, you know, which, which I wasn’t, didn’t have in mind a decade ago applying to venture.
1:16:37 But, you know, today you certainly asked that question, which was like, all right, smart guys, like, you know, you’re sitting around and like doing all this analysis and you have all these smart people and they’re doing all this modeling and all this, you know, research and so forth.
1:16:43 And then like, you know, why, you know, why can’t you just plug this into, you know, Claude or Chagipity or Gemini and have it tell you what to invest in.
1:16:46 And so that, you know, I would say that’s, that’s, that’s the new version of the question.
1:16:46 Yeah.
1:16:50 There was also crypto a few years ago or, you know, ICOs or GOWs.
1:16:51 Oh, yeah. ICOs.
1:16:52 Is that going to be disrupted?
1:17:00 I mean, look, had ICOs stayed, I mean, ICOs were outlawed, basically, but had ICOs stayed legal, you know, then you have, right, you’re off to, you have just a totally different, you know, kind of way things happen.
1:17:05 By the way, it turns out to Ben’s point that the main thing that actually happened was the private markets grew up.
1:17:15 And so, so what actually happened actually, you know, play to the benefit of VCs just through happenstance, I think, in this particular case, which is that firms like ours raise much larger growth funds and, you know, play an even bigger and important role.
1:17:20 But like there, there’s absolutely no guarantee in life that the next structural change like that will work on our, on our behalf.
1:17:26 And so, you know, Ben will tell you, I’m always a little bit of an obsessive paranoid about, you know, what happens when the next change happens.
1:17:27 Yeah. Yeah. No, it’s interesting.
1:17:37 And, you know, I would just say AI, like, I think it might eventually definitely be kind of better at us than picking.
1:17:42 But I would just say that the great thing about venture capital is picking is a small part of the game.
1:17:46 It’s who gets to pick is as important.
1:17:54 And, you know, how much of that can be done with AI.
1:18:00 And I think so much of what a venture capital firm is, what are its relationships with the world?
1:18:03 And, you know, do you get that benefit?
1:18:07 Because to build a company, you just end up needing a lot of relationships.
1:18:14 And, you know, and that’s, that’s what I say, like 90% of the activity at the firm is.
1:18:26 Yeah. And then, Eric, you may know Tyler Cohen has talked about there, you know, there is this long term pattern that actually goes back literally, you know, 400, 500 years of I think what he calls project select, project selectors, project pickers.
1:18:34 You know, so like, you know, the story’s been told many times, but the origin of the concept of carrier carried interest in the venture capital, private equity world is kind of how we get paid.
1:18:38 It actually, you know, goes all the way back 400 years ago to the whaling industry.
1:18:41 How much whale can you carry?
1:18:43 How much, how much whale can you carry?
1:18:56 And so what would happen is literally you would have these project pickers, you would have basically angel investors in whaling expeditions and a whaling expedition, like in Moby Dick, it’s like literally a ship and a captain and a crew and they’re going to like go out and they’re going to try to like go get a whale and bring it back.
1:19:03 Right. Like, and like, you know, it’s like, I don’t know, in the early days of whaling, it was like two thirds of the time the ship comes back, you know, the other third of the time the ship doesn’t come back.
1:19:07 Right. So like, you know, high risk, I return, you know, occupation.
1:19:22 And then so basically there were these guys who were the money, you know, the capital suppliers, and they would sit in these coffee houses or pubs and then the captains would come in and pitch and they pitch the project and they say, I’m going to buy this ship and I’m going to go to this spot and this is me and my approach and here’s how I’m going to staff my crew.
1:19:27 And then the project pickers, you know, the financiers had to decide whether to back the captain.
1:19:31 And then if they did, they give the captain the money to go buy the ship and hire the crew.
1:19:34 And then if the ship, you know, didn’t come back, they’d lose all their money.
1:19:41 If the ship came back with a whale, the carry, the carried interest was the 20% of the whale that the captain and the crew got to keep.
1:19:42 And that was how they got paid.
1:19:47 Right. And so, but like venture capital, like literally they’re doing venture capital.
1:19:51 I mean, you know, Queen Isabella did venture capital when she financed, you know, Christopher Columbus, right?
1:19:52 Exact same thing.
1:19:55 You know, actually the Puritan founders of America.
1:19:56 By the way, that paid off like massively.
1:20:01 It had some negative consequences or side effects, but it was a good investment.
1:20:03 It was a very good venture bet.
1:20:10 You know, the original colonists, the original Puritan colonists of, you know, Plymouth Rock, you know, they actually spent 20 years actually exiled in the Netherlands,
1:20:15 actually essentially raising venture capital, raising money to be able to buy land and come to the U.S. and create the new colonies.
1:20:23 And so, and then, you know, we’re also describing the process of, you know, what are called A&R people at record labels who pick new music.
1:20:27 We’re also describing book publishers, you know, who pick new, you know, new novelists.
1:20:31 We’re also describing movie studio executives who decide what movies get made, right?
1:20:43 And so, you know, basically what Tyler says, I think, is basically like anytime you have a part of the economy in which you have this, you have an entrepreneur going on a high risk, high return endeavor where it is far from clear what’s going to work.
1:20:46 And there are many more aspirants to do that than there is money to fund them.
1:20:50 And it’s this like multifaceted, you know, kind of skill set that’s required to do it.
1:20:53 And, you know, and then by the way, funding them, to Ben’s point, you’re not just funding them.
1:20:57 Like you have to then actually work with them to help them actually execute the entire project.
1:20:59 Like that’s, that’s art.
1:21:00 Like that, that’s not science.
1:21:01 That’s art.
1:21:04 Like we would, we would, we would like it to be science, but like it’s art.
1:21:08 And by the way, how do we know that it’s, how do we know that it’s art and not science?
1:21:15 Every great venture capitalist in the last 70 years has missed most of the great companies of his generation, right?
1:21:22 Like, so the great VCs have a success, you know, record of getting, I don’t know, two out of 10 or something of the great companies of the decade, right?
1:21:27 And so like, if like, and that was true of all these guys, all the legends, you know, that I mentioned earlier.
1:21:32 And so, you know, if it was a science, you could eventually have somebody who just like dials in and gets eight out of 10.
1:21:34 But in, in, in, in the real world, it’s not like that.
1:21:37 You know, it’s just, it’s, you’re, you’re in the fluke business.
1:21:40 And so there’s, there’s this, there’s a, there’s an intangibility to it.
1:21:43 There’s a taste aspect, the human relationship aspect, the psychology.
1:21:45 By the way, a lot of it is psychological analysis.
1:21:47 Like who are these people?
1:21:48 How do they react under pressure?
1:21:50 How do you keep them from falling apart?
1:21:52 How do you, you know, how do you keep them from going crazy?
1:21:53 How do you keep from going crazy yourself?
1:21:56 You know, you, you end up being a psychologist half the time.
1:21:59 And so like, it, it, it is possible.
1:22:02 I don’t want to be definitive, but like, it’s possible that that is quite literally timeless.
1:22:07 And when, you know, when the AIs are doing everything else, like that may be one of the last remaining fields that, that people are still doing.
1:22:08 Yeah.
1:22:16 Ever since I co-founded a firm in 2016, but I’m sure before that too, people were talking about how software was going to disrupt venture completely.
1:22:22 And whether it was crypto or whether it was AI or something else, it, well, the asset class has changed in a bunch of the ways that we described.
1:22:30 It hasn’t been sort of fundamentally disrupted in the same way that we think about disruptive innovation or the Clayton Christensen term, perhaps, as in other industries.
1:22:30 Yeah.
1:22:31 Not yet.
1:22:32 Yeah.
1:22:32 Not yet.
1:22:40 But it could, but again, you know, again, like it could, it could, but you know, we could be doing a podcast and, you know, next year and be like, oh, oh, health.
1:22:49 Well, this is great to get some of the history of the, of the firm and in the future episodes, we’ll talk about where we’re going among other topics that Ben and Mark show is back.
1:22:50 Mark, Ben, thanks so much.
1:22:51 Yes.
1:22:51 Okay.
1:22:52 Thank you.
1:22:52 Yep.
1:22:53 And welcome.
1:22:53 Welcome, Eric.
1:22:54 Yeah.
1:22:54 Welcome, Eric.