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Today, I have the great pleasure of speaking with Marc Andreessen, which means for the first time on the podcast, the guest’s and the host’s playback speed will actually match.
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0:54
Marc, welcome to The Lunar Society. Good morning.
0:58
And thank you for having me. It's great to be here. My pleasure.
1:02
Have you been tempted anytime in the last 14 years to start a company?
1:06
Not a16z, but another company? No.
1:11
The short answer is we did.
1:11
We started our venture firm in 2009 and it's given my partner, Ben and I, a chance to fully exercise our entrepreneurial ambitions and energies to build this firm.
1:26
We're over 500 people now at the firm which is small for a tech company, but it's big for a venture capital firm.
1:31
And it has let us get all those urges out.
1:37
But there's no product where you think — “Oh God, this needs to exist, and I should be the one to make it happen”? I think of this a lot.
1:40
We look at this through the lens of — “What would I do if I were 23 again?
1:44
” And I always have those ideas.
1:49
But starting a company is a real commitment, it really changes your life.
1:49
My favorite all time quote on being a startup founder is from Sean Parker, who says —“Starting a company is like chewing glass.
2:03
Eventually, you start to like the taste of your own blood.
2:03
” I always get this queasy look on the face of people I’m talking to when I roll that quote out.
2:11
But it is really intense.
2:19
Whenever anybody asks me if they should start a company, the answer is always no.
2:22
Because it's such a gigantic, emotional, irrational thing to do.
2:22
The implications of that decision are so profound in terms of how you live your life.
2:29
Look, there are plenty of great ideas, and plenty of interesting things to do but the actual process is so difficult.
2:40
It gets romanticized a lot and it's not romantic.
2:40
It's a very difficult thing to do.
2:45
And I did it multiple times before, so at least for now, I don't revisit that.
2:51
But being a venture capitalist is not like that?
2:51
When you're in the 38th pitch of the day, you're not wondering if chewing glass might not be more comfortable? No, it's different.
2:57
I'll tell you how I experienced it.
2:57
People are wired to respond to stress in different ways.
3:02
And I think there are people who are wired to be extremely productive and get very happy under extreme levels of stress.
3:06
I have a different… I'm fine with stress.
3:14
In fact, I incline towards it and if I don't have any, I seek it out.
3:14
But past a certain level, I don't really enjoy it.
3:19
It degrades the quality of my life, not improves it.
3:25
Maybe you have an affinity for self torture.
3:25
Look, there's stress in every profession and there's certainly stress in being an investor, but it's a completely different kind of stress.
3:39
Because when you're a startup founder, it's all on you.
3:39
Everything that happens is on you, everything that goes wrong is on you.
3:45
When there's an issue in the company, a crisis in the company, it's on you to fix it.
3:50
You're up at four in the morning all the time worrying about things.
3:56
With investors, there's just a layer of buffer.
3:56
We have no end of problems and we help our portfolio companies as best we can with all kinds of issues, like some crisis inside a company.
4:05
But it's not my company, not everything is my fault.
4:11
So it’s a more diffused kind of stress, and honestly easier to deal with.
4:20
Got it, that makes sense.
4:20
Why did you stop your blog?
4:20
Would you ever start it again? I write intermittently.
4:25
The original blog was from 2007 to 2009.
4:33
And then we started the firm, and that was like having a new baby and that soaked up all my time.
4:40
I write intermittently, and then I do social media intermittently.
4:40
Part of it is — I have a lot to say, and a lot that I'm interested in, but also I like to experiment with the new formats.
4:55
We do live in a fundamentally different world as a result of social media, the internet, blogging, Twitter, and all the rest of it.
4:58
So I try to keep my hand in it and experiment.
4:58
But I rotate both how I spend my time and rotate what I think makes sense.
5:08
Before AWS, deploying applications was probably the bottleneck on new software.
5:13
What is the biggest bottleneck today?
5:13
At what layer of abstraction do we need new tools?
5:18
Literally sitting here today, overwhelmingly it's the impact AI is having on coding.
5:18
I think there's a real possibility that basically every application category gets upended in the next five years.
5:31
I think the whole model of how applications get built across every domain might just completely change.
5:37
In the old model without AI, you typically have some sort of database, you have some sort of front end for the database, you had forms, you had these known user interaction models, mobile apps and so forth.
5:48
We got to a pretty good shared understanding of how humans and machines communicate, in the windowing era, and then in the mobile era, in the web era.
6:02
AI might just upend all that.
6:02
The future apps might just be much more of a dialogue between computer and machine.
6:06
Either a written-text dialogue, or a spoken dialogue or some other form of dialogue.
6:11
And the human is guiding the machine on what to do, and receiving real time feedback.
6:16
And there's a loop, and then the machine just does what it does, and it gives you the results.
6:20
I think we're potentially on the front end of that, that all might change.
6:25
The very fundamental assumptions about how software gets built might just completely change.
6:31
The tools on that are at the very front end.
6:31
There's an entirely new stack that needs to get built to do that.
6:36
So that's probably the big thing.
6:41
Is there a reason though that AI is not one of your focus areas?
6:41
As far as I know, you guys don't have an AI fund dedicated to that technology specifically?
6:49
Basically we look at it all as software.
6:49
We look at it like it is the core business.
6:49
Software is the core of the firm, we've been public on that for a long time.
6:54
The core venture fund is the core software fund.
7:00
And then AI basically is the next turn on software.
7:00
And so I view it as the opposite of what you said, it is the most integral thing that we're doing.
7:11
The separate funds get created for the new areas that are structurally different in terms of how industries work.
7:17
AI is basically the future of software.
7:17
And so it's the future of the core of the firm. Got it.
7:24
Now, let's talk a little about your past.
7:29
So you sold Netscape for $10 billion.
7:29
But today, Chrome has what, like 2.
7:34
7 billion users or something.
7:34
And then Opsware was sold for like $1. 7 billion.
7:39
AWS is gonna probably make close to $100 billion in revenue yearly.
7:39
In retrospect, do you think if these companies had remained startups, they would have ended up dominating these large markets?
7:50
So I spend virtually no time on the past.
7:50
The one thing I know about the past is I can't change it.
7:57
So I spend virtually no time revisiting old decisions.
7:57
People I know who spend a lot of time revisiting old decisions are less effective because they mire themselves in what ifs and counterfactuals.
8:08
So I really don't spend time on it.
8:08
I really don't even have theories on it.
8:15
The big thing I would just say is that reality plays out in really complicated ways.
8:20
Everything on paper is straightforward.
8:20
Reality is very complicated and messy.
8:20
The technical way that I think about it is basically every startup is charting a path dependent course through a complex adaptive system.
8:30
And because of that, if you’ve read about this, people had this obsession a while back with what's called Chaos Theory.
8:39
It's sort of this thing where we're used to thinking about systems as if they're deterministic.
8:43
So you start at point A, you end up at point B, and you can do that over and over again.
8:47
You know what happens when you drop an apple out of a tree, or whatever.
8:51
In the real world of humans and 8 billion people interacting, and trying to start companies that intersect in these markets and do all these complicated things and have all these employees, there's random elements all over the place.
9:01
There's path dependence as a consequence.
9:06
You run the same scenario, start with point A, one time you end up point B, one time you end up point Z.
9:10
There's a million reasons why the branches fork.
9:23
This is my advice to every founder who wants to revisit all decisions.
9:27
It's not a useful and productive thing to do.
9:27
The world is too complicated and messy.
9:31
So you take whatever skills you think you have and you just do something new. Make sense.
9:36
Are venture capitalists part of the managerial elite?
9:36
Burnham says that “the rise of the finance capitalist is the decisive phase in the managerial revolution.
9:41
” What would he think about venture capitalists?
9:46
I actually think about this a lot.
9:52
And I know you said everybody can Google it, but I'll just provide this just so this makes sense.
9:58
James Burnham famously said — there's basically two kinds of capitalism and we call them both capitalism, but they're actually very different in how they operate.
10:02
There's the old model of capitalism, which is bourgeois capitalism and bourgeois capitalism was the classic model where the owner of the business was a person who, by the way, often put their name on the door.
10:10
Ford Motor Company, right?
10:15
Andreessen Horowitz Andreessen Horowitz, right.
10:22
And then that person owned the business, often 100% of the business, and then that person ran the business.
10:26
These are the people that communists hated.
10:26
This is the bourgeois capitalist — Company owner, builder, CEO, as one person with a direct link between ownership and control.
10:41
The person who owns it controls it, the person who controls it runs it. It's just a thing.
10:45
There's a proprietor of the business. So that's the old model.
10:49
And then what he said basically, as of the middle of the 20th century, most of the economy was transitioning, and I think that transition has happened and is basically now complete.
10:59
Most of the economy transitions to a different mode of operating, a different kind of capitalism called managerial capitalism.
11:04
In managerial capitalism, you have a separation of ownership and management.
11:09
Think of a public company, you have one set of owners who are dispersed shareholders, and there's like a million of them for a big company, and who knows where they are, and they're not paying any attention to the company, and they have no ability to run the company.
11:21
And then you've got a professional managerial class, and they step in and they run the company.
11:27
What he said is — as a consequence of that the managers end up in control.
11:27
Even though the managers don't own the company.
11:31
In a lot of public companies, the managers might own like 1% of the company, but they end up in total control, and then they can do whatever they want.
11:42
And he actually said — Look, it doesn't even matter if you think this is good or bad, it's just inevitable.
11:45
And it's inevitable because of scale and complexity.
11:45
And so the modern industrial and post industrial organizations are going to end up being so big and so complex and so technical, that you're going to need this professional managerial class to run them.
11:55
And it's just an inevitability that this is how it's gonna go.
11:58
So I really think this is exactly what's played out.
12:04
A consequence of that, that I think is pretty obvious, is that managerial capitalism has a big advantage that Burnham identified, which is that the managers are often very good at running things at scale.
12:13
And we have these giant industries and sectors of the economy and health care and education, all these things that are running at giant levels of scale, which was new in the 20th century.
12:22
But there's sort of a consequence of that, which is managers don't build new things.
12:28
They're not trained to do it, they don't have the background to do it, they don't have the personality to do it, they don't have the temperament to do it, and they don't have the incentives to do it.
12:36
Because the number one job, if you're a manager, is not to upset the applecart.
12:40
You want to stay in that job for as long as possible, you want to get paid your annual comp for as long as possible, and you don't want to do anything that would introduce risk.
12:49
And so managers can't and won't build new things.
12:49
And so specifically, to your question, the role of startups, the role of entrepreneurial capitalism, is to basically bring back the old bourgeois capitalist model enough.
13:03
It's a rump effort, because it's not most of the economy today, but bring back the older model of bourgeois capitalism, or what we call entrepreneurial capitalism, bring it back enough to at least be able to build the new things.
13:17
So basically what we do is we fund the new bourgeois capitalists, who we call tech founders.
13:23
And then there's two layers of finance that enable bourgeois capitalism to at least resurface a little bit within this managerial system.
13:30
Venture capital does that at the point of inception, and then private equity does that at a point when a company needs to actually transform.
13:38
I view it as — we're an enabling agent for at least enough of a resumption of bourgeois capitalism to be able to get new things built, even if most of the companies that we built ultimately themselves end up being run in the managerial model.
13:46
And Burnham would say that's just the way of the modern world, that's just how it's gonna work.
13:54
But you guys get preferred shares and board seats, and rightfully so, but wouldn't Burnham look at this and say — “You're not the owners and you do have some amount of control over your companies.
13:59
” I think he would say that we're a hybrid, we're a managerial entity that is in the business of catalyzing and supporting bourgeois capitalist companies.
14:10
He would clearly identify the startups that we fund.
14:17
He would be like, “Oh yeah, that's the old model.
14:17
That's the old model of Thomas Edison, or Henry Ford, or one of these guys.
14:21
” You can just draw a straight line from Thomas Edison, Henry Ford to Steve Jobs, Larry Page, and Mark Zuckerberg.
14:26
That's that model, it's a founder, it’s a CEO, at least when they started out owning 100%.
14:32
They do have to raise money most of the time, but they're throwbacks.
14:37
The modern tech founders are a throwback to this older model of bourgeois capitalism.
14:43
So you're right in that he would view us as a managerial entity, but he would view us as a managerial entity that is in the business of causing new bourgeois capitalist institutions to at least be created.
14:53
And I think he would credit us with that.
14:53
And then he would also say — however, our fate is that most of the companies that we fund and most of the founders that we back end up over time, handing off control of their companies to a managerial class.
15:10
When the companies we fund get to scale, they tend to get pulled into the managerial orbits, they tend to get pulled into the managerial matrix, which by the way, is when they stop being able to build new things, which is what causes the smart and aggressive people at those companies to leave and then come back to us and raise money and start a new bourgeois capitalist company.
15:34
I view it as — the economy is like 99% managerial, and if we can just keep the 1% of the old model alive, we'll keep getting new things.
15:39
By the way if venture capital ever gets snuffed, it's outlawed or whatever, it just fails and there is no more venture capital, there's no more tech startups or whatever then at that point the economy is going to be 100% managerial.
15:50
And at that point, there will be no innovation forever.
15:55
People might think they want that.
15:55
I don't think they actually want that.
15:59
I don't think we want to live in that world.
16:03
Will this trend towards managerialism also happen to a16z as it scales? Or will it be immune?
16:08
What happens to a16z in five decades?
16:08
At a certain point this becomes the succession problem.
16:14
As long as Ben and I are running it our determination is to keep it as much in the bourgeois model as possible.
16:19
And as you pointed out, literally it’s our names on the door.
16:22
Ben and I control the firm.
16:22
The firm doesn't have a board of directors, it's just Ben and me running it.
16:29
It's a private entity there’s no outside shareholders.
16:35
And so as long as Ben and I are running it, and we're running it in the way that we're running it, it will be as bourgeois model as any investment firm could be.
16:46
Some day there's the succession challenge, and I bring that up, because the succession challenge for tech companies is usually sort of when that transformation happens.
17:00
When it goes from being in the bourgeois model to being in the managerial model.
17:04
And then this gets to sort of the philosophy of succession in tech companies.
17:04
And the general thing that happens there is that, you see this over and over again with the great founder CEOs, when it comes time to hand it off, there's basically two kinds of people that they can hand it off to.
17:16
They can hand it off to somebody like them who's a mercurial, idiosyncratic, high disagreeableness, ornery, sort of entrepreneurial kind of personality, somebody in their mold.
17:31
Or they can hand it off to somebody who knows how to run things at scale.
17:35
Almost always, what they do is they hand it off to somebody who can run it at scale.
17:35
The reason they do that is, there’s actually two reasons.
17:39
There's the theoretical reason they do that which is — it is at scale at that point, and somebody does need to run it at scale.
17:47
And then the other is, they often have what I call the long suffering number two.
17:47
You've had this high octane founder CEO who breaks a lot of glass and then there's often the number two, like the chief operating officer or something who's the person who fundamentally keeps the trains running on time, and keeps everybody from quitting.
18:05
And that long suffering number two has often been in that job for 10 or 15 years at that point, and is literally the longest suffering.
18:13
They've always been the underling, and then it's like — Okay they now “deserve” the chance to run the company themselves. And that's the handover.
18:17
Now, those founders often end up regretting that decision.
18:21
And in later years, they will tell you — Boy, I wish I had handed it off to this other person who was maybe deeper in the organization who was maybe younger, who was more like I am, and maybe would have built more products and maybe that was a mistake.
18:29
But the fact that they do this over and over again, to me illustrates why the Burnham theory is correct, which is — large, complex organizations ultimately do end up getting run by managers in almost all cases.
18:47
The only optimistic view on that is that it's the transition from these companies being in the bourgeois capitalist model to the managerial model that creates the opportunity for the new generation of startups.
18:56
Because then the counterfactual, if these companies remained bourgeois capitalist companies for 100 years, then they would be the companies to create all the new products, and then we wouldn't necessarily need to exist because those companies would just do what startups do.
19:10
They just build all the new stuff.
19:10
But because in that model, they won't do that and they don't do that, almost without exception.
19:16
Therefore there's always the opportunity for the next new startup. And I think that's good.
19:20
That keeps the economy vital, even in the face of this overwhelming trend towards managerialism.
19:27
If you had a fund with a 100 year lock-in what would you be able to invest in that you can’t invest in right now?
19:40
The base lockup for venture is like 10 years, and then we have the ability to push that out, we can kind of push that to 15.
19:44
And for really high quality companies, we can push that to 20.
19:51
We haven't been in business long enough to try to push it beyond that. So, we'll see.
19:57
If you could push it to 100 years, the question is — is it really time that's the bottleneck?
19:57
The implication of the question would be — are there more ambitious projects that would take longer, that you would fund that you're not funding because the time frames are too short.
20:09
And the problem with a 100 year timeframe, or even a 50 year time frame, or even a 20 year timeframe is that new things don't tend to go through a 20 year incubation phase in business and then come out the other end and be good.
20:24
What seems to happen is they need milestones, they need points of contact with reality.
20:30
Every once in a while there will be a company, a very special company will get funded with a founder who's like — look, I'm gonna do the long term thing, and then they go into a tunnel for 10 or 15 years where they're building something and the theory is they're going to come out the other side.
20:43
These have existed and these do get funded.
20:48
Generally they never come up with anything.
20:48
They end up in their own Private Idaho, they end up in their own internal worlds, they don't have contact with reality, they're not ever in the market, they're not working with customers.
20:59
They just start to become bubbles of their own reality.
21:11
Contact with the real world is difficult every single time.
21:11
The real world is a pain in the butt.
21:16
And mark to market your views of what you're doing with the reality of what anybody's actually going to want to pay for, requires you to go expose yourself to that.
21:23
It's really hard to do that in the abstract, or to build a product that anybody's going to want to use.
21:27
And so this thing where people go in a tunnel for 10, or 15, or 20 years, it doesn't go well.
21:32
I think 100 years would be an even more degenerate version of that.
21:36
Best case is this unbounded research lab that maybe would write papers and something maybe comes out the other end of the far future in the form of some open source thing or something, but they're not going to build an enterprise that way.
21:54
And so I think having some level of contact with reality over the course of the first five to seven years is pretty important.
21:59
The other way to get to the underlying question would be — what if you just had more zeros on the amount of money?
22:07
What if instead of funding companies for $20 million, you could fund them for $2 billion, or $20 billion?
22:12
In other words, maybe they would operate on the timeframe of today's companies, on a five or 10 year timeframe, but you can fund them with 20 billion of venture financing, instead of $20 million.
22:26
I think that's a more interesting question.
22:26
It's possible that there are pretty big fundamental things that could be built with larger amounts of money in this kind of entrepreneurial model.
22:33
Every once in a while you do see these giants.
22:40
Tesla and SpaceX are two obvious examples of these world changing things that just took a lot of money and then had a really big impact.
22:46
So maybe there's something there, and maybe that's something that the venture ecosystem should experiment with in the years ahead.
22:55
I would be more focused on that as opposed to elongating the time.
23:01
But what about basic research?
23:01
You've spoken about the dysfunctions of the academic-government-research complex.
23:07
But within the next internet, the next thing that the Andreessen firm 10 years from now is building on top of, if the government effort is broken maybe you need to bootstrap something yourself.
23:17
Have you considered that?
23:22
The strong version of this argument is from a guy named Bill Janeway, a legendary VC.
23:27
Janeway is a great, wonderful guy.
23:27
If people haven't heard of him, he is a PhD in economics.
23:31
I think he’s a student of a student of John Maynard Keynes.
23:40
He comes from a high pedigree in economic theory background.
23:40
And himself was a legendary venture capitalist in his career.
23:44
He became a hands-on investor at the firm Warburg Pincus and funded some really interesting companies.
23:48
And so he's one of these rare people who's both theoretical and practical on this kind of question.
23:52
He wrote this book, which I really recommend, it's called Doing Capitalism where he goes through this question.
24:05
The argument that he makes, along the lines of what you're saying, it’s a little bit of a pessimistic argument.
24:12
The argument he makes is — if you look at the entire history of professional venture capital, which is now a 60 year journey, basically, or maybe even 50 years, from the late 60s, early 70s, in kind of modern form.
24:23
He said the big category that's worked is computing or computer science.
24:30
And then he said, the second category that's worked is biotech.
24:37
And then he said, at least at the time of writing, everything else didn't work.
24:41
And all the money that people poured into cleantech and da-da-da, all these other areas the venture capitalists tried to fund, they just didn't work from a return standpoint.
24:52
You just burned the capital.
24:52
When he wrote the book, he ran the numbers and computer sciences work twice as well as biotech or something like that.
25:04
And then what he said is this is a direct result of federal research funding over the previous 50 years.
25:09
Computer science based venture capital was able to productize 50 prior years of basic research in computer science, information science, information theory, communications theory, algorithms, all the stuff that was done in engineering schools from 1940 through like 1990.
25:32
And so he said — we are productizing that, that's been the big thing.
25:32
In Biotech we are productizing the work that NIH and others put into basic research in the biological sciences and that was about half as much money, and maybe half as much time.
25:47
That work really started kicking in in the 60s and 70s, a little bit later.
25:53
And then he said — Look, the problem is there aren't other sectors that have had these huge investments in basic research.
25:58
There's just not this huge backlog of basic research into climate science or take your pick of online content, or whatever the other sectors are where people burn a lot of money.
26:15
And so he says, if you want to predict the future venture capital, you basically just look at where the previous 50 years of basic research, R&D has happened, federal research funding has happened.
26:25
He has a strong form of it, there's no shortcuts on this.
26:25
And so if you're trying to do venture capital in a sector that doesn't have this big kind of install base of basic research has already happened, you're basically just tilting at windmills.
26:39
I think there's a lot to his argument.
26:39
I'm a little more optimistic about a broader spread of categories.
26:43
A big reason I'm more optimistic about a broader set of categories is because computer science in particular, now applies across more categories.
26:48
This was sort of the underlying point of the software eats the world thesis, which is that computers used to be just an industry where people made and sold computers.
27:00
But now you can apply computer science into many other markets, financial services, and healthcare, and many, many others, where it can be a disruptive force.
27:10
And so I think there's a payoff to computer science and software for sure, that can apply in these sectors.
27:15
Maybe some of the biological sciences can be stretched into other sectors.
27:21
There's a lot of smart people in the world, there's niche research efforts all over the place in many fields that are doing interesting work.
27:25
Maybe you don't get a giant industry out the other end in some new sector, but maybe you get some very special companies.
27:30
SpaceX is a massive advance in aeronautics, it took advantage of a lot of aeronautics R&D.
27:41
It’s not like there's some huge aeronautics venture industry.
27:41
But there is a big winner, at least one, and I think more to come.
27:46
And so I'm a little bit more optimistic and open minded.
27:52
Bill would probably say that I'm naive.
27:52
You mentioned earlier about being able to potentially write 9 or 10 figure checks to companies like SpaceX or Tesla, who might require the capital to do something grand.
28:01
Last I checked, you guys have $35 billion or something under management.
28:05
Do we need to add a few more zeros to that as well?
28:09
Will a16z’s assets under management just keep growing?
28:09
Or will you cap it at some point.
28:15
We cap it as best we can.
28:15
We basically cap it to the opportunity set.
28:15
And it may be obvious, but it's not a single chunk of money.
28:25
It's broken into various strategies, and we apply different strategies to different sectors at different stages. So it's decomposed.
28:32
And we have six primary investment groups internally in different stages, and so that money's broken out in different ways.
28:35
We cap it as best we can to the opportunity set.
28:42
We always tell LPs the same thing, which is we're not trying to grow assets under management, that's not a goal.
28:47
To the best of our ability, we're trying to maintain whatever return level we're maintaining.
28:51
We are trying to eat market share, we'd like to eat as much market share as possible.
28:55
And then we would like to fully exploit the available opportunities, we'd like to fund all the really good founders, we'd like to back all the interesting new spaces.
29:05
But what we wouldn't want to do is double assets under management in return for 5% lower returns or something like that.
29:08
That would be a bad trade for us.
29:14
So to put another zero on that, as I said, we would need a theory on a different kind of venture capital model, which would be trying to back much larger scale projects.
29:27
And again, there's a really big argument you could make that that’s precisely what firms like ours should be doing.
29:31
There are these really big problems in the world and maybe we just need to be much more aggressive about how we go at it.
29:34
And we need founders who are more aggressive, and then we need to back them with more money.
29:39
You can also argue either that wouldn't work, or we don't need it.
29:44
The counter argument on the Tesla and SpaceX examples that I gave is that they didn't need it, right?
29:48
They raised money the old fashioned way.
29:48
They raised money round by round in the existing venture ecosystem.
29:54
And so for whatever limitations you think the existing ecosystem has, and maybe it's not ambitious enough or whatever, it did fund Tesla and SpaceX. And so maybe it works.
30:05
So the underlying question underneath all this is not the money part.
30:12
The underlying question is how many great entrepreneurs are there?
30:12
And then how many really big ideas are there for those entrepreneurs to go after?
30:16
And then that goes one level deeper, which is — What makes a great entrepreneur? Are they born? Are they trained? What made Elon, Elon?
30:29
What would you need to do to get ten more Elons?
30:29
What would you need to do to get 100 more Elons?
30:33
What would you need to do to make 1000 more Elons?
30:33
Are they already out there and we just haven't found them yet?
30:37
Could we grow them in tanks?
30:37
Or just add testosterone to the water supply?
30:46
Yeah or do we need a different kind of training program?
30:52
Does there need to be a new kind of entrepreneurial university that trains entrepreneurs?
30:53
It's just a totally different thing.
30:53
Those are the underlying questions.
30:58
I think if you show me ten more Elons, I'll figure out how to fund their companies.
31:02
We work with a lot of great founders and we also work with Elon and he's still special.
31:09
He's still highly unusual even relative to the other great entrepreneurs. Yeah.
31:18
Let's talk about crypto for a second.
31:18
When you're investing in crypto projects, how do you distinguish between cases where there is some real new good or service that new technology is enabling and cases where it's just speculation of some kind?
31:33
What we definitely don't do is the speculation side, we just don't do that.
31:33
And I mean that very specifically, we're not running a hedge fund.
31:37
What we do is we apply the classic venture capital 101 playbook to crypto.
31:43
And we do that the exact same way that we do with every other venture sector that we invest in, which is to say we're trying to back new ventures.
31:47
In crypto that venture might be a new company, or it might be a new network, or it might be a hybrid of the two and we're completely agnostic as to which way that goes.
31:58
When we write our crypto term sheets, even when we're backing a crypto C Corp, we always write in the term sheet that they can flip it into being a tokenized network anytime they want to.
32:08
We don't distinguish between companies and networks.
32:15
But we approach it with a Venture Capital 101 playbook, which is — we're looking for really sharp founders who have a vision and the determination to go after it.
32:20
Where there's some reason to believe that there's some sort of deep level of technological economic change happening, which is what you need for a new startup to wedge into a market.
32:30
And that there's a reason for it to exist, that there's a market for what they're building and they're gonna build a product, and there's gonna be an intersection between product and market, and there's gonna be a way to make money and you know, the core playbook.
32:42
We go into every crypto investment with the same timeframe as we go into venture investing.
32:49
So we go in with at least a five to 10 year timeframe, if not a 15 to 20 year timeframe.
32:52
That's what we do, the reason that's not necessarily the norm in crypto is an artifact of the fact that — especially anything with crypto tokens, there is this thing where they tend to publicly float a lot sooner than startup equity floats.
33:05
Let's say we're backing a new crypto network, it goes ahead and floats a token as sort of one of the first steps of what it does.
33:15
It has a liquid thing years in advance of when a corresponding normal C Corp would.
33:22
There’s one thing in behavioral economics where when something has a daily price signal and where you can trade it, people tend to obsess on the daily price signal and they tend to trade it too much.
33:30
There's all this literature on this that kind of shows how this happens.
33:30
It's part of the human experience, we can't help ourselves, it's like moths to a flame.
33:35
If I can trade the stock every day, I trade the stock every day.
33:39
Almost every investor in almost every asset class trades too often in a way that damages their returns.
33:48
And then as a consequence of that, what's happened is a lot of the investment firms that invest in crypto startups are actually hedge funds.
33:52
They're structured as hedge funds, they have trading desks, they trade frequently, they have the equivalent of what's called a public book in hedge fund land.
34:03
They've got these crypto assets they're trading frequently, and then they'll back a startup and then they'll trade that startup's token just like they trade Bitcoin or Ethereum.
34:11
But in our view that's the wrong way.
34:11
And by the way there's an incentive issue, which is they pay themselves on a hedge fund model, they pay themselves annually.
34:16
So they're paying themselves annually based on the market for projects that might still be years away from realization of ultimate underlying value.
34:25
And then there's this big issue of misalignment between them and their LPs.
34:30
And so that's all led to this thing where the tokens for these crypto projects are traded too aggressively.
34:37
In our model they just shouldn't be, they're just not ready for that yet.
34:37
And so we anchor hard on the venture capital model, we treat these investments the exact same way as if we're investing in venture capital equity, we basically buy and hold for as long as we can.
34:52
And have a real focus on the underlying intrinsic value of the product and technology that's being developed.
34:59
If by speculation you mean daily trading and trying to look at prices and charts and all that stuff, we don’t do that.
35:07
Or separately, another category would be things that are basically the equivalent of baseball cards, where there's no real good or service that's being created.
35:16
It is something that you think might be valuable in the future but not because the GDP has gone up. Oh.
35:21
Baseball cards are a totally valid good and service. That's a misnomer.
35:26
I would entirely disagree with the premise of that question.
35:33
But are they gonna raise median incomes even slightly?
35:38
Yeah, there are people who make their living on baseball cards.
35:42
Look, art has been a part of the economy for thousands of years.
35:42
Art is one of the original things that people bought and sold.
35:49
Art is fundamental to any economy.
35:49
Would you really want to be part of an economy where they didn't value art?
35:56
That would be depressing.
36:02
Yeah but there's the question of — Do they value art versus are they speculating on art?
36:06
And then how much of the effort is being spent on speculating on the art versus creating the art?
36:11
Well, this gets into this old kind of cultural taboo.
36:11
This depends on what you mean by speculation.
36:17
If what you mean by speculation is obsessing on daily price signals and buying and selling and turning a portfolio, like being a day trader kind of speculation.
36:23
That's what I think of speculation.
36:29
Let's say that's the bad form of speculation, that's the non productive form.
36:34
If by speculation, on the other hand, you mean — look, there are different kinds of things in the world that have different possible future values.
36:40
And people are trying to estimate those future values, and people are trying to figure out utility, and they're trying to figure out aesthetic value.
36:47
Look at how the traditional art market works, is somebody supporting a new contemporary artist speculating or not?
36:53
Yes, maybe from one lens they are.
36:53
Maybe they're buying and selling paintings, and maybe they buy in and if it doesn't start going up in price, they flip it and buy something else.
37:03
But also, maybe they're supporting a new young artist.
37:03
And maybe they build a speculative portfolio of new young artists and as a consequence those artists can get paid, and they can afford to be full time artists.
37:16
And then it turns out they're the next Picasso.
37:21
And so I think that kind of speculation is good and healthy.
37:21
And it's core to everything.
37:21
I'd also say this — I don't know that there's actually a dividing line between that form of speculation, and speculation on what people call investments.
37:32
Because even when people make investments, even just the institutional bond market.
37:36
Look at US government debt, people are today in the bond market trying to figure out what that's worth.
37:43
Because is the debt ceiling gonna get raised?
37:47
Even that's up for grabs.
37:47
To me, that’s not speculation in the bad sense, that's a market working properly.
37:55
People are trying to estimate.
37:55
Ben Graham said “financial markets are both a voting machine and a weighing machine.
38:00
And in the short term, they tend to be a voting machine in the long run, they tend to be a weighing machine.
38:03
” What's the difference between a voting machine and a weighing machine?
38:06
I don't know, some people would say they're very different.
38:10
Maybe it's actually the same thing. Why did prices go up?
38:14
Because there are more buyers and sellers.
38:14
Why do the prices go down?
38:14
There were more sellers than buyers.
38:17
The way markets work is you get individuals trying to make these estimations and then you get the collective effect.
38:23
There's this dirty interpretation of any kind of trading or any kind of people trying to do the voting and weighing process.
38:29
I just think it's this historical, ancient taboo against money.
38:35
It's like in the Bible, Jesus kicking the money changers out of the temple.
38:40
It's this old taboo against charging interest on debt.
38:40
Different religions and cultures tend to have some underlying unease with the concept of money, the concept of trade, the concept of interest.
38:54
And I just think it's like superstition, it's like resentment, it's fear of the unknown.
39:00
But those things are the things that make economies work. And so I'm all in favor.
39:07
I don't mean to get hung up on this — but if you think of something like the stock market or the bond market, fundamentally you can tell a story there.
39:10
Where the reason what these stockbrokers or these hedge fund managers are doing is valuable, they're basically deciding where capital should go?
39:20
Should we build a factory in Milwaukee?
39:20
Should we build it in Toronto?
39:20
Fundamentally, where should capital go?
39:24
Whereas what is the story there?
39:24
What is the NFT helping allocate the capital towards?
39:29
Why does it matter if the price is efficient there? Because it's art.
39:33
NFT is a very general concept.
39:33
NFT is basically just a form of digital ownership.
39:42
There will be many kinds of NFTs in the future, many of them, for example, will represent claims on real underlying property.
39:45
I think a lot of real assets are gonna be wrapped in NFTs.
39:45
And so NFTs are a very broad technological mechanism.
39:49
But let's specifically take the form of NFT that everybody likes to criticize, which is NFT as a creative project or an image or a character in a fictional universe or something like that, the part that people like to beat on.
40:06
And I'm just saying — they're just art.
40:06
That's just digital art, right?
40:06
And so every criticism people make of that is the same criticism you would make of buying and selling paintings, it would be the same buying and selling photographs, of buying and selling sculpture.
40:21
I always like to really push this, what's the Mona Lisa worth?
40:21
I don't want to spoil the movie.
40:21
But the new Knives Out movie, let's just say the Mona Lisa plays a role in the movie.
40:27
What's the Mona Lisa worth?
40:32
One way of looking at the Mona Lisa is that it's worth the cost of producing it.
40:32
It's worth the canvas and the paint.
40:39
And you could create a completely identical reproduction of the Mona Lisa with like 25 bucks of canvas and paint.
40:44
So the Mona Lisa is worth 25 bucks.
40:44
Or you could say the Mona Lisa is a cultural artifact and as a cultural artifact that's worth probably a billion dollars or $10 billion.
40:54
Specifically on your question, what explains the spread between $25 and the $10 billion that it would go out if it ever hit the market.
41:01
It’s because people care.
41:08
Because it's art, because it's aesthetic, because it's cultural.
41:08
Because it's part of what we've decided is the cultural heritage of humanity.
41:13
The thing that makes life worth living is that it's not just about subsistence, that we are gonna have higher values and we're gonna value aesthetics.
41:22
Do you see a difference between the funding the flying cars and the SpaceXs and Teslas versus something that improves the aesthetic heritage of humanity?
41:28
But does one of them seem like a different category than the other to you?
41:33
Or is that all included in the venture stuff you're interested in?
41:37
It's a little bit like saying — should we fund Thomas Edison or Beethoven?
41:41
If push comes to shove and we can only fund one of them, we probably should fund Edison and not Beethoven.
41:46
Indoor lighting is probably more important than music.
41:51
But I don't want to live without Beethoven.
41:51
I think this is a very important point.
41:51
People have lots and lots of views on human existence.
42:04
There's lots and lots of people trying to figure out the point of human existence, religions and philosophies and so forth.
42:07
But kind of what they all have in common, other than maybe Marxism, what they all have in common is — we're not just here to get up in the morning, work in a factory all day, go home at night, be depressed and sad, go to bed.
42:21
We're not just material, right?
42:21
Whatever this is all about, it's not just about materiality.
42:28
There are higher aspirations and higher goals.
42:28
And we create art, we create literature, we create paintings, we create sculptures, we create aesthetics, we create fashion, right, we create music, we create all of these things. And fiction. Why does fiction exist?
42:36
Why is a fake story worth anything?
42:43
Because it enhances your life to get wrapped up in a fake story.
42:43
It makes your life better that these things exist.
42:49
Imagine living in a world where there's no fiction, because everybody's like — “Oh, fiction is not useful. It's not real. ” No, it's great.
42:59
I want to live in a world where there's fiction.
42:59
I like nothing more at the end of the day than having a couple hours to be able to get outside of my own head and watch a really good movie.
43:06
And I don't want to live in a world where that doesn't happen.
43:09
As a consequence, funding movies as another example of what you're talking about, is a thing that really makes the world better.
43:12
And here's the other thing.
43:12
The world we live in actually is the opposite of the world you're alluding to.
43:19
The world we live in is not a world in which we have to choose between funding flying cars and funding NFTs or like in my example, funding Edison versus funding Beethoven.
43:28
The world we live in is actually the opposite of that, where we have a massive oversupply of capital and not nearly enough things to fund.
43:38
The nature of the modern economy is we have what Ben Bernanke called the global savings glut.
43:38
We've just got this massive oversupply of capital that was generated by the last few 100 years of economic activity, and there's only one Elon.
43:46
There's just this massive supply demand imbalance between the amount of capital that needs to generate a return and the actual number of viable investable projects and great entrepreneurs to actually create those projects.
43:58
We certainly don’t have enough flying car startups, we also don't have enough art startups.
44:06
We need more of all of this.
44:10
I don't think there's a trade off, we need more of all of it.
44:15
Have we reached the end of history when it comes to how venture capital works?
44:15
For decades you get equity in these early stage companies, you invest more rounds, it's a 2-20 structure.
44:25
Is that what venture is going to look like in 50 years, or what's going to change?
44:30
I think the details will change, and the details have changed a lot, and the details will change a lot.
44:34
If you go back to the late 60s, early 70s, the details were different then and the details were different 20 years ago.
44:39
By the way, they're changing again right now in a bunch of ways, and so the details will change.
44:43
Having said that, there’s a core activity that seems very fundamental.
44:54
And the term I use I borrowed from Tyler Cowen who has talked about this, he calls it Project Picking.
45:00
When you're doing new things, new tech startups, making new movies, publishing new books, creating new art, when you're doing something new.
45:07
There's this pattern that just repeats over and over again.
45:15
If you look back in history, it's basically been the pattern for hundreds or 1000s of years, and it seems like it's still the pattern.
45:22
Which is, you're going to do something new, it's going to be very risky, it's going to be a very complex undertaking, it's going to be some very complicated effort that's going to involve a path dependent kind of journey through a complex adaptive system, reality is going to be very fuzzy and messy.
45:36
And you're going to have a very idiosyncratic set of people who start and run that project.
45:43
They're going to be highly disagreeable, ornery people because that's the kind of people who do new things.
45:49
They're going to need to build something bigger than themselves, they're going to need to assemble a team and a whole effort.
45:53
They're going to run into all kinds of problems and issues along the way.
45:57
Every time you see that pattern there's this role, where there's somebody in the background who's like — Okay, this one, not that one.
46:09
This founder, not that founder.
46:09
This expedition, not that expedition.
46:09
This movie, not that movie.
46:15
And those people play a judgment and taste role, they play an endorsement, branding and marketing role.
46:21
And then they often play a financing role.
46:21
And they often are very hands-on, and they try to contribute to the success of the project.
46:27
A historical example of this I always use is that the current model of venture capital is actually very similar to how whaling expeditions got funded 400 years ago.
46:36
To the point that the term that we actually have, which is carried interest or carry, which is the profit sharing that the VCs get on a successful startup, that term actually goes back to the whaling industry 400 years ago, where the financiers of whaling journeys — like literally out of Moby Dick, to go hunt a whale and bring its carcass back to land.
47:00
The carry was literally the percentage of the carried amount of whale that the investor’s got.
47:04
It was called carry because it was literally the amount of whale that the ship could carry back.
47:09
And so if you go back to how the whaling journeys off, like the coast of Maine and the 1600s, were funded, there were a group of what we — they didn't call themselves venture capitalist at that time, but there were a group of basically capitalists.
47:20
And they would sit in a tavern or something, and they would get pitches by whaling captains.
47:25
And you can imagine the whaling captains.
47:25
A third of the whaling journeys never came back.
47:32
A third of the time the boats got destroyed and everybody drowned.
47:32
And so it's like — I'm the captain who's going to be able to not only go get the whale, but I'm gonna be able to keep my crew alive.
47:41
By the way, I have a strategy and a theory for where the whale is.
47:46
And maybe one guy is like — look, I'm gonna go where everybody knows there are whales and other guy’s gonna be like — no, that place is overfished, I'm gonna go to some other place where nobody thinks there's a whale, but I think there is.
47:54
And then one guy is gonna say — I'm better at assembling a crew than the other.
47:54
And the other one's like — Well, no, I don't even need a crew.
47:57
I just need a bunch of grunts and I'm going to do all the work.
48:01
And then another guy might say — I want a small fast boat.
48:01
And other guy might say — I want a big slow boat.
48:06
And so there's a set of people, imagine in the tavern under candlelight at night, debating all this back and forth — Okay, this captain on this journey, not that captain on that journey and then putting the money behind it to finance the thing.
48:21
That's what they did then and that's still what we do.
48:21
So what I'm pretty confident about is there will be somebody like us who is doing that in 50 years, 100 years, 200 years.
48:31
It will be something like that.
48:31
Will it be called venture capital? That I don't know.
48:38
Where will it be happening? I don't know.
48:38
But that seems like a very fundamental role.
48:43
Will the public private distinction that exists now, will that exist in 50 years?
48:51
You mean like companies going public?
48:51
Yeah and just the fact that there's different rules for investing in both and just a separate category? Is that gonna exist?
49:01
There's already shades of gray.
49:01
I would say that's already dissolving.
49:01
There's very formal rules here.
49:06
But there's already shading that is taking place.
49:06
In the last 20 years, it's become much more common for especially later stage private companies to have their stocks actually trade.
49:17
Actually be semi liquid and trade either through secondary exchanges or tender offers or whatever.
49:23
That didn't used to happen, that didn't really happen in the 1990s.
49:28
And then it started happening in the late 2000s.
49:28
And then you've got lots of people with different kinds of approaches to have different kinds of private markets and new kinds of private liquidity.
49:35
And look, you've got these new mechanisms, you've got crypto tokens.
49:39
You've got entirely new mechanisms as well popping up representing underlying value.
49:45
And then arguments, debates all the time in public and with regulators and in the newspapers about what counts — Who can invest in?
49:50
This whole accredited investor thing.
49:50
A lot of this is around “protecting investors”.
49:56
And then there's this concept of high net worth investors should be allowed to take more risk, because they can bear the losses.
50:00
Whereas normal investors should not be allowed to invest in private companies, but then there's a counter argument that says, then you're cutting off growth investing as an opportunity for normal investors, and you're making wealth inequality worse.
50:12
That debate will keep playing out.
50:18
It'll kind of fuzz a bit.
50:18
I'd expect both sides will moderate a little bit.
50:23
So in other words, public companies will get to be a little bit more liquid over time.
50:28
The definition of what it means to be public will probably broaden out.
50:28
I'll give you an example.
50:35
Here's an interesting thing.
50:35
So you can have this interesting case where you can take a company private, but it's still effectively public because it has publicly traded bonds.
50:46
And then it ends up with publicly filed financials on the bond side, even though its stock is private.
50:50
And so it's effectively still public because of information disclosure.
50:50
And then the argument is — well, if I already have full information disclosure, as a result of the bonds trading, you might as well take the stock public again.
50:59
Anyway it'll fuzz out somewhere in there.
51:05
Okay, so there's a clear pipeline of successful founders, who then become venture capitalists like yourself, obviously.
51:11
But I'm curious why the opposite is not more true?
51:11
So if you're a venture capitalist, you've seen dozens of companies go through hundreds of different problems.
51:16
And you would think that this puts you in a perfect position to be a great entrepreneur.
51:20
So why don't more venture capitalists become entrepreneurs?
51:25
One reason is it's just harder to build a company, it just flat out is.
51:33
It's not easy to be a VC, but it's harder to build a company.
51:33
And it requires a level of personal commitment.
51:38
Successful venture capitalists do get to a point in life where they start to become pretty comfortable.
51:44
They make money and they start to settle into that sort of fairly nice way of living at some point in a lot of cases.
51:50
And going back to the 2 AM chewing glass kind of thing is maybe a little bit of a stretch for how they want to spend their time. So that's part of it.
52:01
The other part of it is — the activities are pretty different.
52:07
The way I describe it is — actually starting and running a company is a full on contact sport, it's a hundred decisions a day.
52:12
I’ll give an example: bias to action.
52:12
Anybody who's running a company, you have to have a bias to action.
52:18
You're faced with a hundred decisions a day, you don't have definitive answers on any of them.
52:23
And you have to actually act anyway.
52:26
Because if you sit and analyze the world will pass you by.
52:26
And it's like — a good plan executed violently is much better than a great plan executed later.
52:35
So it's a mode of operating that rewards aggression, contact with reality, constantly testing hypotheses, screwing up a lot, changing your mind a lot, revisiting things.
52:50
It’s thousands and thousands of crazy real world variables all intersecting.
52:56
Being an investor is different.
52:56
It's much more analytical, clinical, outside-in.
52:56
The decision cycles are much longer, you get a much longer period of time to think about what you should invest in, you get a much longer period of time to figure out when you should sell.
53:08
Like I said, you generally don't want to trade frequently if you're doing your job right.
53:13
You actually want to take a long time to really make the investment decisions, and then make the ultimate sale decisions.
53:24
VCs, we help along the way, when companies have issues that they're in the middle of.
53:28
But fundamentally, it's a much bigger level of watching, observing, learning, thinking, arguing, in the abstract, as opposed to day to day bloody combat.
53:45
Honestly, it's a little bit like — Why don't the great football broadcasters go get on the field?
53:48
Try being the running back for a season? Got it.
53:59
How soon can you tell whether somebody will make for a good CEO of a large company specifically?
54:04
So can you tell as soon as they've got a new startup that they're pitching you?
54:08
Or does it become more clear over time as they get more and more employees?
54:16
The big thing with being able to run things at scale, there's actually a very big breakthrough that people either make or they don't make.
54:20
And the very big breakthrough is whether they know how to manage managers.
54:24
Say you're running a company with a hundred thousand employees, you don't have a hundred thousand direct reports.
54:31
You still only have like eight or ten direct reports.
54:36
And then each of them have eight or ten direct reports and each of them have eight or ten direct reports.
54:40
And so even the CEOs of really big companies, they're only really dealing with eight or ten or twelve people on a daily basis.
54:43
And then how do you become trained as a manager?
54:51
The way you become trained as a manager initially is you manage a team of individual contributors.
54:54
I'm an engineering manager, I have eight or ten coders working for me.
54:59
And then the breakthrough is — am I trained in how to become a manager of managers?
55:06
If I'm early in my career, the way I think about that is I start out as an individual contributor, let's say an engineer.
55:09
I get trained on how to be a manager of individual contributors, and that makes me an engineering manager.
55:13
And then if I get promoted to what they call engineering director, which is one level up, now I'm a director and now I'm managing a team of managers.
55:17
Anybody who can make that jump now has a generalizable skill of being able to manage managers, and then what makes that skill so great is that skill can scale.
55:27
Because then you can get promoted to the VP of engineering, now you have a team of directors who have teams of managers who have teams of ICs and so forth.
55:36
And then at some point, if you keep climbing that ladder, at some point you get promoted to CEO.
55:40
And then you have a team of managers who are the executives of the company, and then everything spans out from there.
55:44
And so if you can manage managers, at least in theory, you have the basic skill and temperament required to be able to scale all the way up.
55:53
Then it becomes a question of how much complexity can you deal with?
55:53
Can you learn enough about all the different domains of what it means to run a business?
55:57
Are you going to enjoy being in the job and being on the hot seat?
56:01
All those kinds of questions.
56:07
I think 100% of the people we back have the intelligence to do it, maybe half of them have the temperament to do it, and then maybe half of those have the intelligence and the temperament and they really want to do it.
56:21
And by “might want to do it” I mean, 20 years from now, they still want to be running their company.
56:27
And enough of them where we get the success cases.
56:27
But having said that as an entrepreneur, you have to really want that.
56:32
You have to be smart enough and you have to have the temperament and you have to actually want to learn the skills.
56:35
And not everybody is able to line those up. Got it, got it.
56:39
Managing the managerial revolution.
56:46
Actually, that's exactly right.
56:46
The best case scenario is a bourgeois capitalist, entrepreneurial CEO, managing a team of managers who are doing all the managerial stuff required at scale.
56:56
That's the best case scenario for a large modern organization.
56:56
Best of both worlds, they're able to harness the benefits of scale, and they're able to still build new things.
57:07
The degenerate version of that is a manager running a company of people who in theory can build your products.
57:16
But in the Burnham sense, if the CEO is the manager who is running a team of people who want to build their products, that company probably will not actually build their products.
57:25
Those people will probably all leave and start their own companies. Yep, yep.
57:29
Now, as unlikely as this may be, just humor the hypothetical.
57:29
Let's say a16z for the next 10 to 20 years has mediocre returns.
57:35
If you had to guess looking back, what would be the most likely reason this might happen?
57:40
Would it have to be some sort of macro headwind, would it have to be betting on the wrong tech sectors, what would it have to be?
57:49
20 years is a long enough time where it's probably not just a macroeconomic thing.
57:56
The big macro cycles seem to play out over 7 to 10 year periods.
57:56
And so over 20 years, you'd expect to kind of get two or three big cycles through that.
58:03
And so you'd expect to get at least some chance to make money and harvest profits.
58:08
Probably it wouldn't be a macro problem.
58:08
Look, you can imagine it, if a real pandemic happens.
58:08
By the way, I’m now gonna get you demonetized on Google because I'm going to reference pandemics but..
58:21
Don’t worry, I didn't have enough views to be monetized anyway.
58:28
If something horrible happens then you could be in a ditch for 20 years.
58:28
But if things continue the way that they have, for the last 50 years or 80 years.
58:33
There'll be multiple cycles, and there'll be a chance to make money for people who make good investments.
58:42
So it's probably not that, and then there'll be the micro explanation, which is we just make bad investments.
58:48
We invest the money, but we just invest in the wrong companies and we screw up.
58:53
And that's of course always a possibility.
58:53
And probably the most likely downside case.
58:58
The other downside case is — I would build on what I was mentioning earlier, from Bill Janeway.
58:58
The other downside case would just be that there's just not enough technological change happening.
59:12
There wasn't enough investment in basic research in the preceding 50 years in areas that actually paid off.
59:16
There wasn't enough underlying technological change that provided an opportunity for new entrepreneurial innovation.
59:25
And the entrepreneurs started the companies and they tried to build products and we funded them and for whatever reason, the sectors in which everybody was operating just didn't pay off.
59:35
If we hit five clean-tech sectors in a row or something like that, the whole thing just doesn't work.
59:39
In a sense, that's the scariest one because that's the one that's most out of our control. That's purely exogenous.
59:48
We can't wish new science into existence.
59:48
And so that would be a scary one.
59:55
I don't think that's the case.
59:55
And in fact, I think quite possibly the opposite is happening.
59:59
But that would be the downside scenario.
59:59
How vulnerable is a16z to any given single tech sector not working out?
1:00:05
Whether it's because of technical immaturity, or by their regulation or anything else?
1:00:10
But if your top sector doesn't work out, how vulnerable is the whole firm?
1:00:15
Innovation could just be outlawed.
1:00:15
And that's a real risk, because innovation is outlawed in big and important areas like Nuclear.
1:00:20
I always love meeting with new nuclear entrepreneurs, because it's just so obvious that we should have this big investment in nuclear energy and there's all these new designs.
1:00:31
But the Nuclear Regulatory Commission has not authorized a new nuclear design since its inception nearly 50 years ago.
1:00:35
So it's just illegal to build new nuclear in the US.
1:00:35
By the way, there's all these fusion entrepreneurs that are super geniuses, the products are great, it looks fantastic.
1:00:44
I just don't think there's any prospect of nuclear fusion being legal in the US.
1:00:48
I think it's just impossible and can't be done.
1:00:48
Maybe it's just all outlawed, in which case, at a societal level we will deserve the result.
1:00:56
But that would be a bummer for us.
1:01:01
And then I don't know, let's say crypto gets regulated or it's just not ready yet.
1:01:07
It doesn't have to be crypto specifically.
1:01:07
But what happens to a16z as a whole?
1:01:07
I mean, does a whole firm carry on? Or?
1:01:10
Look, it's up to our LPs.
1:01:10
We raise money on a cycle.
1:01:16
So our LPs have an option every cycle to not continue to invest.
1:01:16
Just logically the firm is somewhat diversified now.
1:01:24
We have six primary investment domains.
1:01:24
So at least in theory, we have some diversification across categories.
1:01:31
At least in theory, we could lose a category or two and the investment returns could still be good, and the investors will still fund us.
1:01:37
The downside case from there would be that those categories are actually more correlated than we would want them to be.
1:01:50
As a firm, we have a big focus on software, we think software is a wedge across each of those verticals.
1:01:54
Maybe AI turns out for whatever reason not to work, or gets outlawed or something or just fundamentally makes economics worse or something.
1:02:02
Then you can imagine that hitting multiple sectors.
1:02:06
Again, I don't think that's going to happen, but I guess it's a possibility. Yeah.
1:02:10
What did the old management of Twitter fail to see about the potential of the platform?
1:02:16
So first I'd say that I have a very hard time second guessing management teams, because like I said, my belief is that it's so easy to criticize companies and teams in the outside, it's so hard to run these companies, there are always a thousand factors that are invisible from the outside that make it really hard to make decisions internally.
1:02:35
By the way, the histories on all this stuff are really always screwed up.
1:02:35
Because what you almost always find in the history of the great companies is that there were moments early on where it was really tenuous, and it could have easily gone the other way.
1:02:44
Netflix could have sold out to Blockbuster early on, and Google could have sold out to Yahoo.
1:02:48
And we never would have even heard of those companies.
1:02:51
And so it's really, really hard to second guess.
1:02:58
I guess I will just put it this way — I've always believed and I was an angel investor in Twitter back when it first got started.
1:03:03
I've always believed that the public graph is something that should just be titanically valuable in the world. The public-follow graph.
1:03:08
In computer science terms, Twitter is what's called publish subscribe to the idea of a one way public follow graph.
1:03:22
That ought to be just absolutely titanically valuable, that ought to be the most valuable content, loyalty brand signal in the world.
1:03:26
That ought to be the most complete expression of what people care about in the world, that ought to be the primary way that every creator of everything interacts with their customers and their audience.
1:03:34
This ought to be where all the politics operates, this ought to be where every creative profession operates, this ought to be where a huge amount of the economy operates.
1:03:41
They were always on to such a big idea.
1:03:52
Like with everything, it's a question of — What does that mean in terms of what kind of product you can build around that?
1:03:56
And then how can you get people to pay for it?
1:03:56
But yeah, I've always viewed that the economic opportunity around that core innovation that they had is just much, much larger than anybody has seen so far.
1:04:06
But how specifically do you monetize that graph?
1:04:10
Oh, there's a gazillion ways.
1:04:10
There's tons and tons of ways.
1:04:10
Elon has talked about this publicly so it’s not spoiling anything, but Twitter is a promotional vehicle for a lot of people who will then provide you stuff on another platform.
1:04:22
I'm just taking an obvious example.
1:04:22
He has talked about video.
1:04:27
People create video, they market it on Twitter, and then they monetize it on YouTube. Like, why?
1:04:35
Why is that not happening (on Twitter)?
1:04:35
Musicians will have followings of 5-10 million people on Twitter, they aren't selling concert tickets.
1:04:46
I'm sure this was happening before but where it first came to mind was, if you remember Conan O'Brien when he got famously fired from the Tonight Show, he did this tour.
1:04:51
And I was a fan of his so I was following him at the time.
1:04:56
He did his first live comedy music tour.
1:04:56
And he sold out the tour across 40 cities in like two hours. How did he do it?
1:05:04
Well, he just put up on his Twitter account.
1:05:10
He said — I'm going on the road, here are the dates, click here to buy tickets. Boom, they all sold out.
1:05:15
“Now click here to buy tickets” was not “click here to buy tickets on Twitter.
1:05:18
” It was “click here to buy tickets somewhere else”.
1:05:18
But why isn't every concert in the world, why isn't every live event getting booked on Twitter?
1:05:28
There's a lot of this kind of thing.
1:05:28
As Elon is fond of saying, it's not rocket science. Yeah.
1:05:33
It's funny that a few revolutions in the Middle East were organized in the same way that Conan O'Brien organizes tour, just by posting it on Twitter.
1:05:39
So this is the thing that got me so convinced on social media relatively early.
1:05:44
Even before the Arab Spring, I don’t know if you remember, you might be too young, but there was this overwhelming critique of social media between inception in like 2001 to basically mainstreaming in like, 2011-2012.
1:05:55
There was a decade where there was just this overwhelming critique from all the smart people, as I like to say.
1:06:05
That was basically — this thing is useless. This is narcissism.
1:06:05
This is just pointless self ego stroking, like narcissism. Nobody cares.
1:06:12
The cliche always was Twitter is where you go to learn what somebody's cat had for breakfast.
1:06:16
Who cares what your cat had for breakfast?
1:06:20
Nothing will ever come from any of this.
1:06:20
And then I remember, you could pick up any newspaper on any given day through that period and you could read something like this.
1:06:29
And then I remember when Erdoğan was consolidating control of Turkey.
1:06:29
Erdoğan came out and he said, “I think Twitter is the primary challenge to the survival of any political regime in the modern world,” And I was like — Okay, all the smart analysts all think this is worthless and then a guy who's actually trying to keep control of a country is like, this is my number one threat.
1:06:55
The spread of what that meant, of what the outcomes meant.
1:06:55
I was just like — “Oh my god.
1:06:55
” My conclusion was Erdoğan is right and all the smart westerners are wrong.
1:07:02
And quite honestly, I think it’s still quite early on.
1:07:11
We’re still pretty early in the long arc of social media.
1:07:18
The high level thing here would be — the world in which 5 billion people are on the internet is still only a decade or so old.
1:07:26
That’s still really early.
1:07:26
The world in which 5 billion people are on social networks is like five years old. It’s still super early.
1:07:33
If you just look at the history of these transitions in the past, just look at the printing press as a prescient example.
1:07:45
It took 200 years to fully play out the consequences of the printing press.
1:07:45
We’re still in the very early stages with these things.
1:07:51
I was like ten in 2011 so I don’t know if I would’ve personally.
1:07:56
I would’ve liked to think I would’ve caught on if I was older but maybe not. It’s hard to know.
1:08:00
But it is kind of interesting.
1:08:00
You are personally invested in every single major social media company.
1:08:07
So it’s interesting to get your thoughts on where that sector might go.
1:08:11
Do you think the next ten years will look like the last ten years when it comes to Big Tech?
1:08:15
Is it just going to keep becoming a bigger fraction of GDP? Will that ever stop?
1:08:21
As a fraction of GDP, it’s only gonna go up.
1:08:21
It is the process of tech infusing itself in every sector.
1:08:30
And I think that’s just an overwhelming trend.
1:08:30
Because there are better ways to do things.
1:08:36
There are things that are possible today that were not possible ten years ago.
1:08:36
There are things that will be possible five years from now that aren’t possible today.
1:08:40
So from a sector standpoint, the sector will certainly rise as a percent.
1:08:45
I’m putting my money where my mouth is in the following statement — Entrepreneurial capitalism will deliver most of that.
1:08:53
A lot of that gain will be in companies that were funded in the venture capital, silicon valley kind of model.
1:08:58
For the basic reason we discussed which is you do need to have that throwback to the bourgeois capitalist model to do new things.
1:09:09
Incumbents are generally still very poor at changing themselves in response to new technology for reasons we’ve discussed.
1:09:15
So that process will continue to play out.
1:09:21
Another thing that I would just highlight is — The opportunity set for tech is changing over time in another interesting way.
1:09:27
We’ve been good at going over the dynamic but small slices of GDP in the last fifty years.
1:09:35
And more and more now, we’re going to be going after the less dynamic but much larger sectors of GDP.
1:09:38
Education, healthcare, real estate, finance, law, government are really starting to come up for grabs.
1:09:48
They are very complicated markets and they’re hard to function in.
1:09:52
As startups, it’s harder to build the companies but the payoff is potentially much bigger.
1:09:56
Because those are such huge slices of GDP.
1:09:56
So the shape of the industry will change a bit over time. What is technology?
1:10:03
Technology is a better way of doing things.
1:10:03
At some point, the better way of doing things is the way that people do things.
1:10:12
At some point that does shift market share from people doing things the old to the people doing things the new way.
1:10:20
But let's say you build a better education system somehow.
1:10:20
The government is still going to be dumping trillions of dollars into the old education system or the old healthcare system.
1:10:29
Do you just accept this as a lost cause that basically 50% of the GDP will just be wasted but we’ll make the other 50% really good?
1:10:34
When you're building alternatives, do you just accept the loss of the existing system?
1:10:40
Education is a great example.
1:10:40
I think the incumbent education system is trying to destroy itself.
1:10:46
It and the people running it, and the people funding it are trying to kill it.
1:10:53
And they’re doing it every possible way they can.
1:10:57
For K-12 they are trying to prioritize the teachers over the students which is the opposite of what any properly run company would do.
1:11:02
At the university level, the problems in the modern university have been well covered by other people.
1:11:10
They have become a cartel.
1:11:20
Stanford now has more administrators than they have students.
1:11:20
No company would run that way.
1:11:28
There’s a positive vision where you could turn that into the Bloom two-sigma, single student for single administrator but I don’t think that’s what's happening. Yes, yes. That’s correct.
1:11:35
You could and they’re not. That’s exactly right.
1:11:35
And then you see the federal student loan kind of crazy thing.
1:11:42
By the way, the universities are voluntarily shutting down use of admissions testing.
1:11:46
They’re shutting down SAT, ACT, GRE.
1:11:46
They’re very deliberately eliminating the intelligence signal which is a big part of the signal employers piggyback on top of.
1:11:58
They become intensely politicized.
1:11:58
We now know through the replication crisis that most of the research that happens in these universities is fake.
1:12:03
Most of it is not generating real research results.
1:12:07
We know that because it won’t replicate.
1:12:07
You’ve just got these increasingly disconnected mentalities and there’s some set of people who are obviously going to keep going to these schools.
1:12:24
And then you just look at cost.
1:12:24
A degree from a mainstream university that costs, in ten years, a half-million or a million dollars that has no intelligence signal attached to it anymore.
1:12:31
Where most of the classes are fake, where most of the degrees are fake, most of the research is fake, where they are wrapped up in these political obsessions.
1:12:43
That’s probably not the future of how employers are going to staff.
1:12:51
That’s probably not where people are actually going to learn valuable marketable skills.
1:12:55
The last thing they want is to actually teach somebody a marketable skill.
1:13:00
Teaching somebody a marketable skill is just so far down in the list of priorities of a university now it’s not even in the top 20.
1:13:10
Lot of it is just they’re a cartel.
1:13:10
They operate as a cartel, they run as a cartel, it is a literal cartel.
1:13:14
And the cartel is administered through the agencies, the quasi-governmental bodies that determine who gets access to federal student loan funding.
1:13:19
And those bodies are staffed by the current university administrators.
1:13:24
So it’s a self-governing cartel.
1:13:28
It does exactly what cartels do, it’s stagnating and going crazy in spectacular ways.
1:13:36
There’s clearly going to be an educational revolution.
1:13:36
Does that happen today or five years or ten years, I don’t know.
1:13:42
Does it happen in the form of new in-person tuitions versus internet-based? I don’t know.
1:13:45
Is it driven by us or is it driven by employers who just get fed-up and they’re like — “Screw it.
1:13:52
We’re not gonna live like this anymore and we’re gonna hire people in a totally different way. ” That, I don’t know.
1:13:56
There’s lots and lots of questions about what’s gonna happen from here.
1:13:59
But the system is breaking in fundamental and obvious ways. Healthcare, same thing.
1:14:18
It’s extraordinarily difficult to find positive outcomes in healthcare.
1:14:18
In other words, there’s lots of activity in healthcare.
1:14:24
It’s very hard to find anything that causes people to live longer.
1:14:29
Or to be healthier longer.
1:14:29
Every once in a while there’s a successful new cancer treatment or something but there are all these analyses that show that massive investment and public support for health insurance and all these things.
1:14:39
And the health outcomes basically don’t move.
1:14:45
To the extent that people care at all about the reality of their health, there are going to have to be new ways of doing things and tech is going to be the way through the market for people who have those ideas.
1:14:52
Hopefully these revolutions in education and healthcare are not like healthcare itself where we are always twenty years away from a cure to cancer and we’re always twenty years away from making education technological.
1:15:04
You’ve talked about how big tech is 2 to 4x overstaffed in the best case.
1:15:04
I’m curious how overstaffed do you think venture capital is?
1:15:10
How many partners and associates could we let go and there really wouldn’t be a difference in the performance of venture capital.
1:15:19
My friend Andy Rachleff, who is the founder of Benchmark and teaches venture capital at Stanford.
1:15:22
I think his description of this is correct.
1:15:22
He says — Venture capital is always over staffed and over funded.
1:15:27
His estimate is that it is overfunded by a factor of 5.
1:15:38
It should probably be 20% of the size that it is.
1:15:38
It should be 20% of the number of people, it should be 20% of the number of funds, it should be 20% of the amount of money.
1:15:43
And his conclusion after watching this for a long time and analyzing it was it’s basically a permanent 5x overfunding, overstaffing.
1:15:54
It goes to what I referenced earlier which is, the world we live in just has a massive imbalance of too much money chasing too few opportunities to invest the money productively.
1:16:05
There’s just too much money that needs long run returns that looks to venture as part of their asset allocation.
1:16:09
In the way that modern investors do asset allocation.
1:16:16
The full version of it he describes is that — there’s only ever been two models of institutional investment.
1:16:20
There’s the old model of institutional investment which is 60-40 stocks and bonds that kind of dominated the 20th century up until the 1970s.
1:16:24
And there’s what’s called the Swensen model.
1:16:27
Swensen who created the Yale endowment in its modern form and that’s the model that all the endowments and foundations have today and increasingly sovereign wealth funds, where they invest in alternative assets.
1:16:36
Which means hedge funds, venture capital, real estate and things that aren't stocks and bonds.
1:16:42
So anybody following the Swensen model has an allocation to venture capital, on average that’s maybe 4% of their assets.
1:16:50
But 4% of the entire global asset base is just a gigantic number.
1:16:55
It’s like someone once said — It’s like having a 6th marriage, hope triumphing over experience.
1:17:04
The thing you will hear from LPs is every LP says they only invest in the top ten venture capital funds and every LP has a different list for who that is.
1:17:08
They all kind of know that the whole sector is overfunded, but they all kind of know that they suffer from a real lack of...
1:17:17
where else is the money going to go?
1:17:23
And then, it’s always possible that you’ll have some great new fund, there’s some great new sector that will open up.
1:17:31
A huge advantage that venture capital has is the long dated part of it.
1:17:37
It means you don’t suffer the consequences of a bad venture capital investment upfront.
1:17:42
You get a ten year lease on life when you make a venture capital investment.
1:17:48
You’re not gonna get judged for a long time.
1:17:48
And so I think that causes people to invest more in this sector than they should.
1:17:53
Is the winner's curse also a big component here where the guy who bids the most is the one who sets the price? That can happen.
1:17:59
At the early stages the best companies tend to raise at less than the optimal price because the signal of who invests is more important than the absolute price.
1:18:07
And so almost every investment that we fund at the Series A stage, they could raise money at 2-4 times the price they raised from us.
1:18:19
But they value the signal.
1:18:19
And I think that’s also true of the seed landscape and it’s also still true in a lot of cases at the series B level.
1:18:24
Series C and beyond it becomes much more of an efficient market.
1:18:29
Again it’s not a full auction.
1:18:29
It’s a little bit like your earlier question.
1:18:33
At least here’s the theory — it’s not just money, it’s not just a straight up liquid financial market.
1:18:42
These are whaling journeys.
1:18:42
By the way, there’s a much blunter answer to this question which is — people who raise seed money and series A money from the high bidder often end up really regretting it because they end up raising money from people who don’t actually understand the nature of a whaling journey, or a tech startup.
1:18:57
And then they panic at the wrong times and they freak out.
1:19:03
And the wrong investors can really screw up a company.
1:19:08
At least historically, there’s a self-correcting equilibrium that comes out of that.
1:19:08
Where the best entrepreneurs understand that they want someone on their team who really know what they’re doing and they don’t want to take chances with someone that’s gonna freak out and try to shut the company down the first time that something goes wrong. But we’ll see.