Andreessen Horowitz Part II

0:00 I need an M1 so that we can not have this very quiet little background noise that hums that we have to remove in our audio that annoys me to the nth degree. There's a million reasons I need an M1 Mac, but this one is clear and present. I can't wait. September. Who got the truth? Is it you, is it you, is it you Who got the truth now?

0:24 Is it you, is it you, is it you Me down Another story Got.

0:32 Welcome to season nine, episode two of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal and I am an angel investor based in San Francisco. And we

0:55 Are your hosts. Well listeners, welcome to Andreessen Horowitz Part Two. We last left Mark and Ben in their instant messenger conversation in two thousand nine with the famous first words. We oughta start a venture capital firm, and I was thinking the same thing. Yeah. I think that conversation was actually It was actually two thousand eight.

1:16 Two thousand eight. That makes more sense. Launched in oh nine. Takes a little while. We'll get into it. We'll get into it. It takes a little while to you know set up a venture firm, raise the money. Well, you don't just like snap your fingers and have three hundred million dollars. Well, today, listeners, we will cover the next 11 years from the firm's founding to today. This is the story of the VC firm that basically changed everything in the whole landscape. Super high valuations, massive fund sizes, criticism for both of those things, becoming an investment firm and a media company. popularizing the message that former operators make better VCs than career investors do. I mean, David, reflecting back, it's pretty crazy that A sixteen Z is only eleven, twelve years old. Wow.

1:59 Yeah, they became a big dominant force so quickly. To put it in perspective, they were founded two years after the iPhone came out. Oh, that's right. That's right. Pretty good time to start a venture capital firm. Perfect timing.

2:14 Well, listeners. Two things to highlight if you like the show. One is our Slack, and when I say Slack, I do indeed mean the company that A sixteen Z made three ish billion dollars investing in. Do you mean tiny spec? Oh, sorry, I do mean tiny spec. You're right. We've got uh great discussion of these episodes, uh, crypto, investment ideas, all the good stuff with a community of eight thousand super smart people like yourself.

2:39 join at acquire.fm slash slack. And the limited partner program. This is our members only community where we drop Special for subscribers content. The most recent one was with Kyle Simani, who is the co-founder and managing director of Multicoin Capital. We talked with him about how to manage a crypto fund, uh how it's different than managing a normal fund, which is very different on this show.

3:05 What was his line that he was like oh'cause they have a hedge fund and a venture fund all doing crypto and he was like, Well the demarcation is You know, if time to liquidity is more than like six, nine months or so, we put that in the venture fund. Oh wow. Yeah, a whole completely different universe. Uh if you want to listen to that, uh or any of the other LP show episodes or join us on our next upcoming Zoom call with LPs. you can click the link in the show notes or go to acquired.fm slash LP. All right listeners.

3:34 Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do. operate with obsessive customer focus.

4:08 They embedded inside a massive law firm. Four months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time.

4:41 And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million to a hundred million in ARR.

5:27 In about. Eighteen months. truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client.

5:43 If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at Lagora.com slash acquired. And just tell him that Ben and David sent you. Alright, well listeners. As usual. The show is not investment advice.

5:59 David and I certainly hold equity in some of the companies that we're going to talk about on the show. So please do your own independent research. None of this is investment advice. is for informational and entertainment purposes only. And

6:12 Disclaimer disclosure. I do have A new Investing vehicle that I am.

6:19 Super excited about. It is called. Kindergarten Ventures. And it is a Angel Fund that I've started with my buddy Nat Manning, who's the COO of Kettle. Great company.

6:31 That we've talked about a bunch on This show. So as I said last time. A few of the Andrews and Horowitz. GPs are small LPs in the fund.

6:42 I don't Think? That That has had any Influence on

6:47 I've been keeping you honest. Uh yeah. I mean Ben Ben, you keep me honest here. I mean I'm gonna be pretty laudatory of Andreason here, but I think I would have done that anyway, but you you can keep me honest here. Well, David, congratulations. Uh exciting you are moving from Angel to Super Angel in the two thousand eight parlance. That's right. Pretty cool.

7:05 And just like Ben and Mark originally. It's not just about seed investing. Really it's about In a large part all the great folks. Unaquired. We invest at any stage, any sector.

7:15 We are Super angels. Alright, you're starting to spoil stuff. Take us in. one of the tent pole theses of the start of Andrews and Horowitz. Indeed, indeed. Well we'll see where kindergarten goes over time. Okay. So as you said.

7:31 at the top of the show. We finished last time with the Oh, it's not. Ben Gilbert. gets off the obvious recruiting call from Douglione at Squia. He hangs up and he

7:43 I am, Mark. I am. I love it. So you might be wondering like huh, why aren't they Starting a company. Why are they starting a venture firm? Well venture was something that Mark at least had supposedly been interested in, you know, back from his first kind of early days in the Valley.

7:59 He says to D. wonderful writer Tad Friend in the great New Yorker piece that we are gonna keep referencing today. He says to him about Venture Capital, quote, I always thought the entire venture thing was incredibly cool.

8:14 Going to Kleiner Perkins with the high ceilings, the markers on the wall of all the great companies they IPO'd, Larry Ellison walking through and And at eleven AM. The biggest buffet you'd ever seen. At a time when I was eating at Subway It was the closest thing to a cathedral for nerds. That's some way to talk about uh

8:35 The venture capital industry. So As we talked about, Mark and Ben of course have been doing there. Super angel investing thing. You know, this wasn't entirely a huge leap, but

8:44 As many. Many people would point out to them. And of course, as they knew themselves. Building a venture capital firm That is gonna like lead deals and beat out

8:55 other venture capital firms to lead deals is a very, very different proposition than being An angel investor. Yeah, I mean in this angel investing they were doing, and we should say Mark and Ben did thirty six deals together over just three years, so a deal a month. with their own money of I think about two hundred K of a max check size, they're pretty much not leading rounds.

9:19 So they already don't have the dynamic of, you know, needing to be the one to set the terms and come in that is about to hit them in a big way of a total difference between coming in as a participating and and versus lead investor. Oh man, I'll say having now made the opposite journey, it is way easier and way more fun not to be a lead investor. But that's a whole nother story. But

9:43 Like we said, it's a pretty interesting and definitely contrarian. Time to start. A venture firm. Here we are in you know late two thousand eight, early two thousand nine. Of course, what's going on?

9:55 The financial crisis. And So Yeah, most other VCs.

10:01 And if not VCs, certainly the LPs. They're all like tucking their tails and triaging their portfolios right now. You know, this is not about deploying more money or starting a new firm, like Sequoia's literally just done the RAP good times. Presentation. You know, it's kinda crazy to like

10:19 Think that oh. We're gonna go start a new firm right now. Yeah, it's wild. So Here they are and you know, uh obviously we've talked about the

10:28 Last time the big thesis that they have that there is no bubble. They're kind of all alone in shouting from the rooftops here that hey, like things are actually great in Silicon Valley. This is not like the dot com crash. The financial crisis is actually only gonna be great. for Silicon Valley startups. And of course they are right about all this. But Pretty much.

10:48 Nobody else is saying this, isn't it? Tab would write in the New Yorker piece later. That's A sixteen Z was designed From the beginning to be a full throated argument.

10:58 About the future. Of course the time when nobody else was making that argument. So They've got this insight. They've got the interest in V C and the

11:08 drive to make it happen to go build a firm. They're Mark Andreessen and Ben Horowitz. But they're still just two dudes. And if you want to pull off what they want to pull off They're gonna need a whole lot more. And that.

11:20 So They go to see who else. But their old friends. Andy. Ratcliffe.

11:27 And Andy by this point, of course, had stepped back from benchmark and he's teaching at Stanford GSP. And He is just made the jump to become an entrepreneur. Himself he has founded.

11:39 Well front. But Of course. Knowing. Andy.

11:43 There is nothing. That gets him more jazzed than the idea of a in the words of Howard Marks that he uses A correct Non consensus.

11:53 Bet. And That is. Obviously exactly what Ben and Mark are trying to do here. So Andy tells him.

12:01 This is great. I love you guys and I love this. Contrarian. Bet that you're making. But

12:08 You want to be in the upper echelon of V C firms. And you need a strategy to break in. And you see, we did this at Benchmark about ten years ago when we started Benchmark. And we've talked about this a lot on the show, but What we did at benchmark was we counter positioned.

12:23 against one of the two major incumbents at the time. Which was. Cliner. Markets. Cliner.

12:30 As we've talked about, there was the Karezu approach to venture capital. All of our companies work together in different ways. It's sort of like, you know, they're they're like a mesh network and we sort of sit in the network as the capital provider, but they work with each other in all these different ways. Yep. And like On the one hand, that was great. But on the other hand, you know, certainly some of the Kleiner entrepreneurs felt like they were pressured into Doing deals and working with other clear portfolio companies that Didn't really make sense for them.

12:57 So what Andy and Benchmark did is they said There is no pressure from us. to do anything else. We are gonna treat you As Sovereign states and help you make the best decisions for you. So that was one.

13:09 The second piece of the benchmark counter positioning against Kleiner. Maybe this is the most important. The thing about Kleiner during its heyday was It really was John Door. And we gotta do a whole episode on Kleiner itself. And story and history even before John Door, but like

13:27 The glory days. It was all. John, you know, all their big wins from Netscape to Amazon and beyond It was John that sourced them. And John was the reason why the entrepreneurs wanted to take Kleiner's money.

13:40 But the thing about how it worked. That wasn't talked about a lot. was John would source the deals. He would be the face of Kleiner, the reason everybody wanted to work with them. But they need farm out the board seats. Yeah, other partners and even

13:56 Associates. So how do you counter position about against that? Benchmark is like well. This is great. We're gonna be a small equal partnership. All the partners here are gonna be great people you want on your board. You know what you're getting. somebody from Benchmark, you're getting an equivalent maybe not quite an equivalent, but they talked about like an equivalent of John Dora and

14:15 Your partner is actually gonna sit. On. You're bored. So then. If your benchmark you need to start talking about how important it is

14:24 Who your board member is. Right. And it's sort of this like all about the individual. You form one trusted relationship. They aren't promising to do anything for you that You know we're not gonna like

14:37 Staff up. your company. We're not gonna help you with PR. We're gonna be the best financial investor and board member possible. And you're gonna have this really tight one to one relationship with someone that you really, really want involved in your company personally. Totally. And I think it's worth doubly underlining this because

14:56 Obviously it is super important who your board member is, and the right advice from the right board member can make a huge difference. Today when we just take this for granted, it's like, you know, fish and water. You're like, Oh yes, of course, the board member that you have from your venture firm is super, super, super important. That wasn't The case And you could actually ask the question of like

15:16 Is that The truth. Period. Totally. We're gonna talk about a lot of things on this episode that Andreessen Horowitz introduced into common startup wisdom. This was the one that Benchmark introduced into common startup wisdom. Yep, and the reason they introduced this into startup wisdom was specifically to fight against climate park. It was a uh strategy credit. It worked really well for them.

15:39 Exactly, exactly. So then of course the last piece of the benchmark counter positioning. related to all of this and all working in concert together was Kleiner is this huge firm. I know it's got lots of tiers of partners and lots of people there and lots of politics and lots of functions that aren't investing partners.

15:56 So Benfre they said we're gonna do the opposite. We're gonna be a small, flat, equal partnership. So we're all gonna get on board. In a way that's Politics at a bigger firm like Kleiner would sometimes make.

16:08 Difficult. Of course, there's a lot of luck that goes into building a venture capital firm. As well. And Probably the most important thing for Benchmark was that they made that early investment in eBay and like All of this strategy and all this counter positioning.

16:23 Sure, that helped but like They got eBay. You know, nothing else kinda mattered after that. And that helped them ascend to the Top of the venture capital. Hip.

16:33 So now okay, Mark and Ben. Like they sort of knew all this and they're hearing this from Andy and they're like Huh. Okay. Well What are we gonna do? And you know, remember, of course, they love Andy

16:45 But they hate Benchmark. Yeah, and we should say like the way that benchmark established these tenets that they hold true the way that Andreessen Horowitz is about to It's not. pure marketing, at least from what I can tell in all the research. It is a self-examination of what are the things we hold to be true.

17:03 And then what are the subset of those things that we can make a really loud marketing message about that we were kinda gonna do anyway, but play to a massive advantage for us. Yep. So They're like, Well, we like this counter positioning thing, Ben and Mark are. Who are we gonna count our position against?

17:21 Not Kleiner. And probably not Sequoia, like we talked about on the last episode. Like you're gonna come at the king. You best not miss and uh That just seems like really hard. Maybe we should counterposition against Benchmark.

17:38 It's like uh the old saying, you either die a hero or you live long enough to see yourself become the villain, right? Oh, and on that note I know you're about to talk about this later, and so I won't disclose how Mark announced the existence of the fund, but in the first sentence of the interview that he did announcing the fund, he literally said the sentence, I'm crossing over into the dark side. That's actually great because I I cut that from the quote that I was gonna use. That's the perfect Perfect. So much later.

18:08 Ben w would actually just say point blank, he was like, Yeah, we were always the anti benchmark. Our design was not to do what they did. And of course he's referring to Them. Telling him that he wasn't CEO material, but also just like in general, we're we're gonna Do the opposite of what they do. So now the question becomes, okay.

18:27 You know, Mark and Ben know what they're gonna do. They're gonna counter position against Benchmark. How do they do that? Well, the obvious first thing is we don't fire founders here. uh and we support young technical founders help them become the best CEOs That they can be, and we're not gonna do what David Byrne tried to do to us.

18:44 And I love the way they talk about this because Clearly it's something they deeply believe having both been computer science undergrads and gone on to become founders of companies. The way that they sort of describe it is

18:57 Without uh synthetic network. Without a network of what Andreess and Horowitz would become. A technical founder.

19:07 doesn't really have a chance of becoming a professional CEO. the pace of the company's growth is going to require A CEO network. a CEO's sort of understanding of how to organization build much faster than someone can develop those skills. So the thesis behind developing

19:26 what would later become platform at the entire VC ecosystem platform teams. was really Mark and Ben saying, Well, how can we synthetically create or simulate all the tools that a real professional CEO has If you are a technical founder, if you are the innovator. because their core belief, they believe that the innovator should be the one who is running the company.

19:49 And if that is true. Oh my gosh, there's all these problems that now we have to like help them fix. Totally. Well, now. Think about how this all fits back into these various V C firms strategies. So what was Kleiner's strategy for Overcoming this. It was the Kiretsu.

20:05 You know? Great. We're gonna take all these founders and all these young companies And how do we Turbocharged them into being real companies and building their networks and doing deals, we're gonna have them all work together. And we have the best companies, and so that's great. Now think about the benchmark strategy, right? Of like

20:22 we're gonna position against Kleiner. What do you need if you're the benchmark strategy? You need CEOs who are grown ups who are capable of standing on their own and running the companies'cause they're not gonna get a lot of support on that front. From Benchmark'cause it's just the partners.

20:38 So now it starts to explain some of the behaviors here over the past few decades. You show me the incentives, I'll show you the behavior. Exactly. Exactly. Okay, so they start thinking about this. They're like, What are we gonna do? Well

20:54 We want to raise a big fund and we want to be a big firm. We're gonna have a lot of management fees associated with that, and we Mark and Ben, you know, we don't really need the management fee income streams. We've made plenty of money and we're used to is being entrepreneurs, not VCs, you know, not getting high ongoing salaries. Lumpy cash flows. Exactly, exactly. So what if we take all these management fees and we staff up, we build a platform.

21:19 at Hendrix and Horowitz. So two and a half percent. Of Three hundred million dollars is seven and a half million dollars. A year.

21:28 That's A lot of money. Right. And classically the When people say two and twenty, it's two percent on average for the lifetime of the fund. So you can sort of say In the back half, we're not going to be doing as much active work on this particular portfolio. So we'll take one and a half at the front end, we want to take two and a half to balance it out.

21:44 But yeah, David, you're right. It's like Gosh, if we're not paying ourselves, which we should say for at least the first two years, Mark and Ben did not take a salary We got a lot of cash we can spend on stuff. Yeah. on people and resources.

21:59 So then you start thinking about this uh dynamic, you start thinking about The rest of the venture. industry through Mark and Ben's lens as as former entrepreneurs, you know. If you've got These firms that are small partnerships, not that many people

22:15 But they're just getting these huge management fee streams. Well, it's kinda weird then that these VCs are telling entrepreneurs Oh, you know. You should take like fifty thousand dollar annual salaries, which is what mean it was the norm back in these days. Fifty, sixty thousand dollars is your annual salary and

22:34 Yeah, you should give us this big ownership. But we're gonna make a few mil a year each, you know, rain or shine out of these management fees. Hm. Interesting. So the next piece that they start thinking about is

22:46 is uh of how they can counter position. So Benchmark. More so than pretty much any other venture firm, even to this day.

22:56 But lots of venture firms felt the same way. They had this series A purist approach. And really this idea that still permeates Venture to this day that the series A, that's the real

23:08 craft adventure. That's the like you know the board's related to this board member thing that like that round is the sacred special round where the shoe leather really gets polished, so to speak. And to say why. Because in this very clear cut world, which we're not in now, of these crazy names for rounds and incredible fluidity of rounds.

23:31 There was not a seed asset class. There were no seed firms. And so the series A was your first professional venture capital institution coming in and writing a check into your company, taking a board seat the first time you have real governance. And before that, you have whatever cowboy would help you as an angel investor. get to something that looked venture capital fundable.

23:54 If that even happened at all. I mean, in many cases the series A that was the very beginning'cause you needed a few million dollars to go buy servers and do all that. But by the time we're talking about here In two thousand eight, two thousand nine. The series A has really become this like catbird seat.

24:12 For the venture capitalists. Because they can outsource all the real early stage risk. To the seed stage. with way less capital, you know, have these companies get going. And then once they kinda start to show

24:25 Product market fit. And a lot of the risk has been removed, then the Series A venture firms can come in. lead around and there's still all this, you know, sort of hangover baggage width around where it's like, well it's the norm that whoever leads your series A is gonna get a huge ownership percentage in your company, like twenty-five, thirty percent

24:46 Ownership. And it turns into this total bonanza for the venture firms who aren't really taking that much risk. So Mark and Ben are like hmm. Well

24:55 What if we say That Andreessen Horowitz We'll do any round. At any time. We'll do seed. We'll do lots of seeds.

25:05 And we won't take board seats in the seed. investments. And you don't need that much capital. We won't give you that much capital and we won't take that much ownership. And then we'll do series A's, sure. But we'll also do series B's and we'll also do growth rounds.

25:23 So listeners who are not professional venture capitalists listening to this, it kinda sounds like okay, cool, yeah, they'd have a different strategy. They don't focus on a stage, they just focus on lots of stages. And For Anyone who has raised a fund before, you will know how insane this sounds. Like What

25:40 Venture capitalists classically pitch to LPs is Our sweet spot investment is this. It is a company that looks like this. It is a stage that looks like this. It is an ownership percentage that looks like this. It is a check size that looks like this. And it's a set of governance rights that generally look like this. And we intend to do that twenty to forty times. And that is how we will construct our portfolio. And so therefore there can be a bunch of different variations among the companies as they go along. There'll be winners, there'll be losers, but they'll all kind of start out like this. So that's what you're buying.

26:12 And by starting a venture firm and being like, we're like stage agnostic, we're governance agnostic. It's just so wait. Sorry, what's the thesis? Totally. It seems crazy, but You know, again, they look out at the ecosystem and they're like Wait a minute.

26:27 There's these super angels, of which we've been them. We're doing great. We're cleaning up on Twitter and Facebook and LinkedIn and Zynga, I think. Groupon, like all of these companies. We're in them, we're doing great at seed. Why on earth would we stop that?

26:43 Then they look downstream past the series A. There's a whole set of venture firms. At this point in time that All they do. Is they just ride the coattails of Sequoia and Benchmark and Kleiner. And they say, What series A's did they do? Great, we're gonna come in, we'll mark it up like two X at the series B. We'll ride along. And they're doing great. And so Andreessen's like

27:03 You know, Andrews Norris, they're like, We can blow these guys out of the water. Then They look across even further and they're like, Whoa. There's this whole other asset class out there. There's like I'm talking about like Summit and T A and Silver Lake, which is gonna come back up. Now those guys They're deploying a lot of capital.

27:22 They're getting less multiple returns, but like The dollar returns that they're generating are enormous right now. In pretty short periods of time with very, very protected downside. So like very low risk, low multiple, but fast return big dollar amount investments. Totally. And they don't even pretend to offer Any of the stuff that like venture firms pretend to offer. So like Huh.

27:48 Okay. Great. So this whole set of things, this we're gonna build A big Firm.

27:56 People wise, we're gonna use the management fee resources to build out platforms to help technical founder CEOs become CEOs. And they would later call these networks, like each individual function, you know, recruiting or finance or acquiring enterprise customers. They call these networks at the firm. Yep. So we're gonna do that. We're gonna

28:16 Not necessarily focus solely on series A's like we'll do series A, series A's are great, but we'll also do seeds, we'll also do growth. rounds because we think there's opportunity there and we can break in. And then the governance thing, like Yeah, sometimes we'll take board seats, sometimes we won't take board seats, but we don't necessarily need to, and maybe that'll help us scale. I would say uh all of that collectively becomes the counterpositioning against benchmark.

28:42 You know, and it works to varying degrees. Like on the whole, it works great. There are a few specific things that don't work. So like The seed and the governance in particular. I think these are good ideas and they work now. But at the time

28:57 They sort of inadvertently leave A pretty big flank exposed to old school VCs here. Which becomes this signalling. Affect. This became talked about for like

29:08 five to seven years after this was an issue. Oh my God, people are still talking about this like three, four years ago, which is insane. All right, so what is it, David? So If Ben and and Mark are gonna go out there And do all these seeds and not take board seats.

29:21 Well the question then becomes If they don't invest in the next round in the series A or later. Is that gonna send a really negative signal to the market of like, Oh, well And Jason Horowitz had the inside information on this company because they did the seed. And now they're doing the A in a competitor.

29:40 Does that mean that the original company that we seeded is no good? Other VCs in private and in public vehemently. Attack Andre Sonorowitz on. This front. The reality is

29:53 The most Exemplary cautionary tale. About this. Is completely the opposite. And that is of course Instagram. Instagram. Yep. Uh.

30:03 Which is so great. So Andreessen. Along with baseline. Does it be a good thing. The seed. In

30:09 Instagram. And then chooses at the series A. And one of the most boneheaded decisions of all time to instead back competitor. Pick please. Well, right,'cause they ended up both being in their portfolio'cause Instagram started as Bourbon, pivoted into Instagram, suddenly Andrews and Horwitz has a problem because they have two competing things in their portfolio and they're like

30:29 Well, we gotta pick one and we're picking pick please. Totally. So now what actually happens here, like oh what you would think, you know, if you buy the narrative of the attack against entries and horits oh signaling effect Instagram They're toast. Far from it. They go raise a series A from Benchmark, from Matt Collar at Benchmark, and of course we know.

30:47 What happens there. And what happens to Pickles, which is Nothing exciting. So the reality is the signaling effect kinda works more against the VC firm than Against the companies.

30:59 But you know. Okay. So David, we've got This thing where the innovator should be running the company.

31:07 Andreessen Horowitz is going to have all these networks that are going to augment that innovator and give them a CEO like you know, resources at their disposal so they can really be the professional CEO and the technologist who brought it into the world. They're gonna spend a bunch of management fees to make this possible. They're gonna raise a pretty big fund for the time, three hundred million dollars. They're doing wacky stuff with portfolio construction. Okay. So All this is great, right? They've got this great theory, the you know grand unified theory of counter positioning and you know, market entry strategy into the venture industry. Blah blah blah. All good.

31:42 But Andy's like, you know, look, guys. There's this one other thing. Which is the reality on the field. I've done a bunch of research. here, you know, since I joined the faculty at G S P and I've

31:53 concluded, you know, with data approved what we all knew all along. Which is that there's a very small finite set of companies that get started in the Valley every year that actually matter. And it is a blood sport. Two.

32:07 win the lead position. as an investor in those companies. And you're fighting against benchmark and Sequoia and Kleiner, and you can counter position all you want. But like you're gonna go fight against John Dorr, and you're gonna go fight again, and you're gonna fets Maritz and Leone and all these guys, and how are you gonna win? Just like you know, the Mike Tyson quote.

32:24 You you've got your plan, you're gonna you know, it's gonna work until you get punched in the mouth and they are gonna punch you. In the mouth. And how are they gonna punch you in the mouth? Well, they're gonna say things like You know, yeah, Mark and Ben like

32:37 Mark and Vincent the browser and that's great and whatnot, but you know, they haven't been VCs. They haven't been board members. They haven't been professionals here. But the other thing that they're gonna say. And that's gonna cut. Way deeper for you guys.

32:49 Is there gonna say that you guys Don't have staying power. You know, as Don Valentine would have said back in the day, obviously not about Mark and Penn, but he would have said Where are the monuments? What's Netscape? What's opsware?

33:01 You know, you guys have built these good stories, good companies. They're not around anymore. Who's using Netscape? Nobody. So you talk this big game. But where's your ebay? Where's your Cisco? Where's your Oracle? Where's your Google? They aren't there.

33:14 You want to work with us. We've got those monuments. So There's this great quote from the uh Fortune cover story when they launched the firm.

33:23 But There's this quote in there that says Just five years ago, Andreessen's image was more that of a smart Amiable. billionaire Playboy who dabbled ineffectually at technology's fringes. He seemed more Paul Allen than Bill Gates. Then

33:40 In the same piece. This is the from the launch of Andreas and Horo. It's like think about, you know, who was placing these quotes. There's a quote from Steve Case. Somebody dinned up Steve Case to like give a quote here. Mark is like a rock star who had his first album hit big and then the next ones were not quite the same. Ooh. Brutal, right? Like they're getting punched in the mouth.

34:04 Hard. Wow, those are brutal. So David, you're implying then that in this punch you in the mouth landscape that's going on, the journalist is doing research for the story and they just get connected with people who are gonna from day one, right out of the gate, beat the crap out of Mark and Ben's accomplishments. Yeah, like I I'm sure Mark and Ben and uh

34:24 The great people they were working with on the PR side, which we'll get into in a sec. They weren't the ones that Pointed, uh pointed people to this quote. The Steve Case thing is interesting too, given that Mark reported to him for nine months as the CTO of AOL. Totally. There's actually another sentence to the quote where it really softens the blow. Something like people have a lot of respect for him that he's persevered or something like that. But the point like the damage is done here. Yeah. So they're like huh.

34:52 We're gonna have to deal with this. Fortunately. They know somebody. Who knows a thing or two. About punching other people in the mouth.

35:00 And that is their other Old board member from the Loud Cloud Opsware Days. The original OG, Hollywood superagent. Michael.

35:11 Ovit. Oh yeah. So great. We've talked a lot about Ovitz on this show. CAA and

35:20 The whole Disney debacle where he goes and becomes president of Disney. And then we of course talked about So yeah, him joining the Loud Cloud board after that on the last episode. But I think if Andy was the you know, the inspiration for the sort of highfalutin strategy of Anderson Horowitz.

35:36 Michael was the inspiration for the like Okay, how are we gonna get this done? So The quick story. You know, on Ovids is he started in the late sixties.

35:46 In the mailroom of William Morris, you know the storied Long term. Hollywood talent agency and everybody started in the mailroom back in the days. Anna The dynamic in Hollywood was totally broken. Like we're talking here about how

36:00 the venture and startup dynamics were a little broken at this time. Like Hollywood was Bad. The studio's controlled. Everything. They held all the power. They held all the creative decisions. You know, the talent and the artists

36:16 The actors, the directors, the writers, et cetera. They were They were more, but little more than indentured. Servants and the agencies like William Morris. You know, they claimed to represent the talent, but they real they knew who the real customers were, which were the studios.

36:31 I don't know if we've talked about it before on the show, but I've talked about it before with other folks in the Pioneer Square Labs context of how startup studios fit into the landscape. But I love this equivalence between the Hollywood and tech where especially in the old school days, you sort of have the V Cs, which are a lot like the studios and the there were three to five major VC firms with money and there were three to five major studios with money that could green light a movie. And then of course you've got

37:00 the CEO founder, who's a lot like the director of a film. And then everyone else, including the actors who works on the film, is a lot like the team of the startup. And watching the way that the power dynamics evolved between these two ecosystems in parallel is really fascinating. Totally. So What Ovitz does so he and a bunch of buddies from William Morris, they're like

37:22 Screw this. There's gotta be a better way. They leave and they go start their own firm. It's exactly like Jerry McGuire. Jerry McGuire was actually about this guy Lee Steinberg in the sports agent world, but it's the same story. So they leave they're gonna they're gonna start a new firm and they're gonna focus on the talent, not the studios. They're gonna figure out how to deliver the power. to the artists and the talent and take it away from the studio. So how do they do that?

37:44 One. They package Projects. And talent. together and then they sell whole packages.

37:51 And say, We'll sell the rights to you. But By doing that versus like, Oh, we represent this actor and you studio, you're making this project. And we're like, No, no, no.

38:02 We got the project. And the artists on the project and we've packaged it and we're gonna bid these studios off against one another. To finance it at the highest. Price. So how do they do that? Well, they gotta connect up.

38:14 The talent. They gotta take the talent from being like each individual person from their own to like working together against the studios. How did they do? That's Well they

38:25 transform what the firm from being, you know, each individual agent is a silo. to We are A network. We're like a web network. They call it the franchise.

38:37 And so anybody who's part of CAA, you know, your job is to have your Clients. But to get them to work with all the other clients of the firm that are represented by a shared rolodex. A shared roll dex. And so to do that Everybody at CAA is a partner. No mailroom, no blah blah blah. Like we're all here. We're all together. This is about

38:58 The franchise. And it's really fascinating in like a business strategy context, zooming out what they did, and this is a common discussion point on Stratekery. of like what is the point of integration within a value chain. And what it used to be was at the studio level, because that's where the money would come from, and then they would get to aggregate all the resources together using their money and the fact that it wasn't that competitive because there were very few people that they were competing against and they knew them very well.

39:26 And nobody wanted to lose their power. And when you start having CAA say, actually We're gonna package all this together. The point of integration shifted down the value chain one click.

39:39 It was happening with CAA. Exactly. And the important thing here is wherever the point of integration is. That's where you gain power.

39:48 that's where you're able to become more than a commodity, where you're able to gain basically you're able to create margin where you're able to get more Cash. for something that it costs you to assemble it. So

40:01 What does CAA do? They create the project. So like Jurassic Park. Lethal weapon. Schindler's List These are CAA projects. These are not studio projects.

40:12 They pull them together. And then they bit'em out to the studio. Since now all of a sudden all these studios Bidden against one another, the price goes way up, the dollars flowing into the space goes way up, and the artists all do way better. So Tom Cruise, Kevin Costner, Barbara Streise, and Steven Spielberg, you know, within a couple of years, CAA is just vacuuming up. Everybody. And so literally the term

40:37 that they use that uh I think Ovit's coins are very become sad about CAA and Hollywood. about all this is they become quote the dream execution machine. You're an artist, you have a dream. CAA is your dream execution machine.

40:53 It's great marketing. Oh my God. So Ben and Mark, they're like, oh holy crap, this is so great. Oh what Better. What better analogy to use? Then we're gonna go build the dream execution machine.

41:10 In startups. Which happens to work particularly well because they're working with technical founders. Exactly. you have the glint of a dream and the ability to create the sort of

41:21 Core piece of value, the core way a customer interacts with it and and gets value out of the product. But like you can't do all the other stuff. We are the dream execution machine. You should come to us. Yep. Yep, they're just like a director or a great actor or A great writer.

41:36 Et cetera. So the sort of last unwritten but it didn't need to be a written principle at CIA was Take no prisoners and we're gonna burn the old system to the ground. Like F all of those people. And of course Ben and Mark have that same ethos about Adventure.

41:52 Ecosystem. And whether theirs was written or not internally, it certainly became written externally in all of their communications. Like they pulled no punches in talking about how the entire existing incumbent industry sucked and people were Greedy or uh we'll pull some quotes later, but they were not shy about being critical of the establishment. Totally. So

42:14 This is the punch back in the mouth. Like, great, you're gonna punch us in the mouth, say that we're, you know, has been rock stars who are one hit wonders, like we're coming at you twice as hard. Uh so that's what they do. And they also, you know, basically wholesale copy the firm building approach from CAA. So, you know, as you said, the platform and the networks that they build up. They hire a whole bunch of people. They have a biz dev network to connect founders with large Company customers. They've got an executive recruiting network. They've got an engineer recruiting network. They've got a

42:47 A future financing like a other venture firm's network and an MA network associated with that, too. You need an acquire, we'll hook you up with acquires. And then of course. Probably. The most differentiated and important last piece of this is They have a PR.

43:03 Network. Yeah, which they wouldn't say is the most differentiated. The most differentiated I think they would say is like the executive briefing center and our ability to you know, galvanize a set of Fortune five hundred companies to become your customers. But in reality, yes, they are masterful. At PR.

43:20 Well, Ben would say later, I had this quote later, but here's the perfect spot for it. He would say. Literally, we introduced a new concept to the field of V C. Which was called marketing. Uh and it's true. Nobody you know, no venture firms were

43:36 doing this for themselves or helping their companies. with PR and marketing. Before entry Snowet. Well, the interesting thing about why no venture firms were doing it about themselves was the commonly accepted wisdom is that opacity plays to our advantage.

43:51 I think most people didn't actually think through it. They just thought What have successful venture capitalists done in the past, and that was Be opaque. Don't make too much

44:01 PR noise other than to claim your win when you have it. But you don't need to take these big positions and be brash and counter position publicly. And Andreessen Horowitz not only saw that as a thing they could exploit But I can't remember if it was Mark or Ben I was listening to on a podcast that we'll link to in the show notes, along with a lot of other sources we did for research for this one. Brought up the fact that

44:23 If you trace back the origins of institutional firms like venture capital firms, it comes from the investment banks of like the forties and fifties, who were opaque because they were financing wars. There was lots of reasons about why they wouldn't talk about where their returns were coming from or their excitement about the projects they were financing. Whereas Mark and Ben are unabashed optimists about the future, Mark in particular, of

44:51 just standing on the largest soapbox possible and preaching about how cool the future will be and how much better off everyone will be, both on average and in the every spot in the distribution in the long run. So let's bring that closer as fast as possible and be really loud. about the future that we see and about the companies that we're investing in to build it and how much we believe in that and how Unapologetic we are about that. Yeah. And that was just totally different than the commonly accepted wisdom of how venture capitalists should go to market. Yeah. Well, two things. One, I think the version of hiding the war financing of investment bankers that V Cs were doing here was

45:30 They're hiding the management fees. Like, come on, you got a ten person organization, half of which are assistants, and you're making twenty mil across your funds and management fees a year. Like I don't want to shout that from the rooftops if I'm a P C verb. Or brag about how I'm putting two million into work to own thirty to forty percent of a company. Yeah. Exactly. Then the other thing though, like The flip side is

45:53 If you are gonna go be unabashed about Pounding the table about what you're doing in the future. If you're an entrepreneur who you think you're part of building that future. God, now you've got a champion.

46:03 This is great. Yep. So There's one other person. along these lines that they go see before launching the firm.

46:11 Which is the number one Hands down. Best PR person. In Silicon Valley at the time. Margot.

46:19 Wenmarkers. At the outcast. PR agency. So Market had co founded Outcast and they had All the best clients. Like

46:28 All the best clients. Facebook, Salesforce, VMware. And they worked with them from like the time they were nobody's still up through, you know, being huge companies. Mm. Amazon. They did the Kindle. Watch. And still work just

46:42 may to this day still work with the Kindle team. So the story of how they get connected is Market tells this on an A sixteen C podcast episode. She uh says that one of the companies that Mark and Ben had been angels in Wanted to work with Outcast. But Facebook

46:57 blocked it and said it was a conflict and wouldn't let out cast. Work with them. So Mark had just joined the board of Facebook. And He gets involved in trying to smooth this all over and he's like, Wow

47:09 Market is really amazing and I see a Facebook like what she's doing there. So he Jin's up an excuse to get her contact info, calls her up, you know, supposedly to talk about this situation. And instead brings her to the creamery and Palo Alto sits down with Ben and they just like Talk the whole time about how they're gonna launch a venture capital firm. Uh I've got another project for you.

47:28 Which is great. So Mark is like, Okay, you know, like we work with venture capital farms. I I can do this. What are you gonna call the firm? And they're like We're gonna name it Andreessen Horowitz. She's like, that is a terrible idea. You're talking about this big game about how you're gonna be a franchise, you're not gonna be about the partners, you're it's all about the entrepreneurs and network, and you're literally gonna put your own names on the door. Like, are you serious? Uh and they're like, No, no, no, no, no, it's not what you think.

47:54 We did a whole big branding exercise about this. We hired a big branding firm. We did all this work and we decided We need to do this. For two reasons. One Andreessen or Mark Andreessen is a known quantity. He invented the browser. Sorry a brand. It's already a brand. He's already a brand. So we can draft off of that.

48:11 And then Once we get going. We transition from Andreessen Horowitz Two.

48:19 Um Sixteen. See. Which is A to Z.

48:25 So you know, supposedly the story is I guess it's you know, probably true. That people used to abbreviate internationalization to I actually no, it's definitely true. My first job when I was fourteen was as a product test engineer at this medical printer company in Cleveland. And I did not know that. That's awesome. We're learning some Ben Gilbert history. Yeah. And I did some internationalization work, which you only need to type that once before you're like, Well, I never want to type that word again. And that is abbreviated I eighteen N.

48:54 Uh uh. So people really do do this. Absolutely. And there's another one. I think it's localization. Might be L something N, L sixteen N or L eleven N, something I can't remember how many letters, but yeah. Interesting.

49:08 So they're like, well, it's perfect. You know, it's kinda a geeky reference. Super esoteric. Super esoteric, but it's A to Z. And we're gonna do A to Z. Yeah. Andrew Snorritz will do any round A to Z. This is great. By the way

49:23 you'll get a heads up that Mark and Ben are gonna step back from the firm when they actually formally change the name to A sixteen Z. I was looking for it in this most recent visual refresh that they did. I'm like, oh is it time? Are they actually flipping it to A sixteen Z? But nope, nope, the official logo as you'll see on the art for this episode is still Andrews and Horowitz. Still interesting. Oh, it's interesting. It's gotta become I mean, all across the website, everywhere, and all the media they do. It's A sixteen C. It's not Andrew Snaro. It's

49:52 Yeah, but you know, it's still the unofficial moniker. Still there, baby. So There's one other thing, one other benefit about the name, which we know very, very well. Acquired. They're gonna be listed first in the phone book. Yeah. Huge advantage. Huge advantage. I mean, it literally is a huge advantage. You know, anytime

50:12 That A reporter's writing a piece about the talking about various venture capital firms, you know. As much as not. They're just gonna alphabetise stuff then. Who's gonna come first?

50:22 Andrews and Orowitz is gonna come first. We happen to be just very lucky that podcast clients are not terribly sophisticated in how they do sorting. And so whenever you subscribe to a show, it just displays them in alphabetical order. Totally. Uh, so Margaret's like, Yeah, all right, whatever, fine. All right, you guys have done a lot of justification to put your names on the door. I won't I won't argue with you. Rationalize, rationalize, rationalise, great. Yep. But what you need is you need to build up hype and you need a cover story. So

50:52 What do you want to do? What outlets do you want to go on? Where's your cover story? You know, I can get you whatever you want. What do you want to do? So February of two thousand nine. Mark goes on. Charlie Rose.

51:05 Even fifteen years later it holds up really well. Yeah, it was really good. So landing Mark on The show when there's no reason for it's not like he has a new company or anything. Like there's no In fact, the funniest thing is that uh I tweeted this from the acquired account last night. There's uh some point where it brings up the little like title tag underneath and it says Mark Andreessen

51:25 I think it's founder. Yeah, Founder Ning. You're like founder of Ning Like it was true.

51:34 At the time, but like did anyone care about Ning? Not really. That's the best you can come up with. Yeah. Yeah. We should be clear, like he is on the board of Facebook. Like he's like involved in some like stuff that's going crazy. He's an investor in Twitter and Twitter is in like its third month of like vertical line growth. He's not just the Netscape guy. he's involved in something that these companies that are

51:56 part of a cultural phenomena at the moment. Totally. Still it was a pretty big win for Outcast to get him on the show. So um

52:06 Charlie starts off and says, You know, when we interview people like you, we always have to ask the question. What's the hottest idea there in Silicon Valley? What's the next big idea? So Mark replies Well Maybe this goes off track from your question. He's great at redirecting. He's obviously had some training. But I think the hottest idea

52:25 is that innovation is actually alive and well. Remember this is February two thousand nine. But look, there are a lot of people out there who are arguing the other side of that. So he's already setting up like we are the champions of innovation. Only we can save you. Then Charlie asked him about Rumors he's been hearing.

52:45 That Mark is. Starting a venture capital firm. Like rumors you've been hearing. This is why he's on the show. Like generous of you to give him rumors he's been hearing from Marget that you are starting a venture capital firm. And you have to realize Before you finish, like I think it is worth planting this seed. I watched this interview because I I was reading an article and I was like Oh.

53:06 This article says that he announced it on the show. Like I should go watch the Charlie Rose interview where he announces it. And I start watching it and like I get twenty minutes in and I'm like, this isn't about Andrews and Horowitz. And then I remembered like exactly what you opened with. Obviously It wasn't a brand yet. He wasn't known for being an investor yet.

53:24 And so if you're making the pitch to Charlie Rose of you need to have this guy on the show Charlie's throwing Mark a bone by letting him mention his new project to galvanized it on this show. And so of course it only occupies three minutes of a fifty minute interview. Some microplyers with. As you said at the top of the show though. Yes, I'm going to the dark side. But then he says.

53:48 So I'm creating a fund. And As you know, our claim to fame is we've actually Bin. Entrepreneurs. We're buy entrepreneurs.

53:58 For entrepreneurs. We've done it. We've been on that side of the table for a long time, we know. What it's like. Yet another way they're counter positioning. It's like uh My gosh, these professional investors out there, you don't want to work with them. You want to work with us because we've been in your shoes, which is now like

54:14 The dominant dogma that VCs feed to founders. And then just kinda uncommon. Like they were the first You heard it here first on Charlie Rose. Yeah. Yeah.

54:27 It's actually really funny, did you get to the part later in the episode where They're talking about like various new seed stage companies in Silicon Valley. And Mark starts talking about This really interesting guy who's starting a company

54:41 And he's proven demand for it. Yes. He describes like what we do at PSL, like the validation process of like driving traffic and having a brand and testing conversion. You just built a landing page, there's no product. Did you get to the part where he says who it is? Yes, it's Andrew Chen. It's Andrew Chen. Ten years later. So great. So great. And he's like trying to remember, Oh, what was that guy's name? Right. He pitched me on this thing. I think he's getting close to having a round that's coming together. Good for him. And of course, like this is pre Uber. Like Andrew hadn't even done the growth thing at Uber yet. Oh so great. Uh these artifacts of history. I just love'em.

55:15 It's like when Don Valentine holds up the resume and it turns out to be Alfred Lynn's like it's like that kind of reference. It's one of those moments, totally. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

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57:11 So The actual Big cover story reveal, as we've said. July two thousand nine. Cover story Fortune magazine.

57:21 Marcus, I think not barefoot in this one. Uh on a throne. Uh I actually didn't see what the image was. I'd be very curious. I'll look it up while you talk. Great. They announce Andreessen Horowitz. three hundred million dollar fund, which was Very large at the time, especially for A first time.

57:38 Fund. The piece starts off with the old Netscape email story about uh with that we told last time about Ben emailing Mark about the launch back at Netscape and Mark replying like Next time do the effing interview yourself, F you Yeah. And then this is where the quote From Mark of This is why I should not run another company.

58:02 comes up. Which of course like this is the perfect Oh yes, we're starting a venture capital firm because I shouldn't run another company. Ha ha ha Perfect. So the cover image is this like pretty hokey Uncle Sam gag where it's Mark pointing at the camera and it says, I want you. To get

58:18 The future. David, I'll I'll hold it up so you can see it here in the camera. Oh my God, that's so great. I want you to get the future so present given that uh future. Would be The future for them. That's awesome. Okay, so

58:33 First. Quote entrepreneurs are sure to be attracted to Andreessen. Drafting off the Andrewson brand here. who expresses more kinship with founders than with his peers in the finance world. One blog post.

58:47 That Mark has written. Titled. The truth about venture capitalists. Raised the question. VCs.

58:55 Question mark. Soulless and rapacious capitalists Or surprisingly generous philanthropists. Two guesses which side of the uh coin he comes down on in that piece. Talk about punching back in the mouth. It's like how could you even have listed the second one? It's like of course it's not the second one. Yeah Has anyone in John Door's life or Don Valentine's life ever accused them of being merely a philanthropist? Like

59:23 No, come on, it's the readers of fortune too. They do some great philanthropy, but uh but not through Sequoia and Kleiner Perkins. No. Definitely not. I mean it's a value creator for the world, clearly, I believe that, or I wouldn't be in this line of work and you and us doing the show and everyone listening, but like It's not philanthropy.

59:41 Uh, it's just so easy for Mark to set up these uh straw men here. The but the punches are flying in this article. We've already alluded to this a little bit. So Later in the piece. Another quote. The Andreessen Horowitz strategy of investing in a menagerie of startups could pose.

59:59 Hazards. And here's a direct quote. In the article. If I were one of those guys whose company stumbles Well they they being Mark and Ben.

1:00:09 Or will they have time? Says Paul Holland, general partner at Foundation Capital. A Silicon Valley. Venture firm.

1:00:18 Where the pain part of it comes is when you get up to those sixty or seventy investments. It will be an interesting chore to keep track of all that. Bad idea to go on the record here, Paul. Like everyone's just finding a way to talk their own book. It's like whatever my strategy is is superior because XYZ. Whatever they're doing is stupid because of XYZ. Yeah.

1:00:39 Totally, totally. So it lands with a big splash. They're in business. They got this three hundred million dollar fund. It's summer two thousand nine. I think According to Pittsburgh. The very first check they write is actually a small

1:00:52 Very small check. early I think they hadn't even done a final close on the fund. Into Do you know the company Ben? Is it Seattle based? Not a Seattle based company. This is a very small check that they write.

1:01:03 No. That is led by somebody else of a then This is like at the end of two thousand eight, so it must have been just like a first close on the fund. uh like a warehouse investment or something like that. A then Very

1:01:18 Very hot company, end of two thousand eight. In Silicon Valley. Not Facebook. Not Twitter. Another social media company.

1:01:27 LinkedIn? Nope. Dig. Dig.com. Dig. I knew he was an I thought that was a personal investment. I think it was, but I think they managed to get a little bit of fund money into their series C was obsessed with dig. Oh, so great.

1:01:43 Kevin Rose, amazing. In the Reddit versus Dig War, I was so team dig as like better designed, it makes more sense. I watched Dignation, I think every episode of Dignation. I was all in So great. So great. Me too. Oh, I was the best. So that was the first. Then the first like Real actual like large Check round that they lead.

1:02:04 Is a Seattle company. Aptio. Ap de O. While doing research for this episode, I was on a bike ride and I rode past the Aptio building and uh I was like listening to some podcast interviews with Mark and Ben. And I took a selfie and sent it to David and I was like, doing research. And the irony is

1:02:22 I was going to a Giants game in San Francisco right at the same time. And when I get out of the Uber, like a block away from the Giant Stadium. I get out. right in front of Intri Snorowitz's new San Francisco office building with the with the big sign up front.

1:02:38 I didn't notice if it was A sixteen C or Andreessen Horowitz. I think it was Andreessen Horowitz. It's Andreessen Horowitz. Yeah. Yeah, you know if they're putting it on the sign that the intention is for it to stay around for at least a few more years. At least a few more years. But yeah, that the Aptio investment. I mean it's a co investment with uh both of our our former employer Madrona. Yep. And Greylock, I think, too. Yeah, and I think they had worked with Sunny in the past, the founder at at uh was it at Loud Cloud? So I think Sunny's previous company had been acquired into

1:03:09 Wow, cloud. But that was really emblematic of Part of the what the thesis was at that point is we've worked with these amazing people over the course of our careers. We're gonna be a network driven firm. And they didn't have the firepower yet to be a thesis driven firm. Like now they're extremely thesis driven, but at that point it was like

1:03:29 Oh. This guy an entrepreneur and starting a company or it was I think already a a company in flight, like absolutely we should invest him. We know him very well. He's great employee. Totally.

1:03:38 Well. So one of their other first checks. Speaking of stage agnostic. Oh speaking of that same, you know, we're gonna invest in uh in the swear loud cloud uh diaspora. Great great indeed. Truly great people. I think this is one of their first like five or ten. Investments.

1:03:57 Rock melt. Rock Melboy, great friend of the show. Eric Fishria. Former. Opsware VP of marketing.

1:04:05 Future benchmark capital. General partner. Eric. Vishria. Pretty cool. So funny.

1:04:13 That they led his round. Benchmark, I don't think, was an investor in Rockmelt. Well, the other funny thing about that is that it was supposed to be a next generation web browser. And obviously like Mark knows a thing or two about web browsers and Rockmelt was like, you know, what if the browser had built in social characteristics and could bring in your your newsfeed and Twitter and all this stuff right into the browser. So it was like a sweet spot investment for Mark and Ben having worked directly with Eric and then also, you know, Mark saying that seems plausible.

1:04:41 Yep. Totally. It was. It was a great idea. It was I remember using it. I thought the browser was great. It was built on Chromium. You know, it was in many ways it was brave Before

1:04:50 It was Brave Too Early and before crypto was a thing. Yeah. Okay, do you know what what I was referring to, speaking of stage agnostic? Uh you're talking about their fifty million dollar investment in September two thousand nine. in the first year of operations of the fund out of a three hundred million dollar fund

1:05:08 fifty million into one company. That ended up looking genius, but boy did this cause a lot of kerfuffle and criticism when they did it. Boy did it. Ever. September. Two thousand nine.

1:05:23 Fifty million dollars. Deployed alongside Silver Lake. The private equity firm Silver Lake. Tech private equity firm? Silver Lake. Who I believe

1:05:36 The Silver Lake headquarters are in The same Rosewood office park on Sandhill Road that the Anderson headquarters are in. Maybe they talked about it at lunch at the Reswood one day. We haven't talked about the headquarters on literally in the Rosewood complex. On Sandhill. Like can't get any better than that. Nope.

1:05:54 So yeah, fifty million dollars into the spin out of Skype. From eBay. So the whole transaction, a two billion dollar Purchase of sixty five percent of Skype.

1:06:05 From Ebay. Worked out pretty well, but they probably should have spun out PayPal instead of Skype. That would have been a lot better. Hey, I mean uh well They did eventually, but both of them ended up being

1:06:17 Really fantastic. Ideas. Both of them created a lot more value independently. Oh, ideas. But yeah, and Jason Horowitz wasn't part of the paper's building. Yeah. Early stage investors often talk about how there's a minimum ownership percentage that they need to hit in order for it to be meaningful for the the fund return, which is true if you're only deploying a very small percentage of your fund. But This is a case where they used fifty million dollars to buy one point eight percent of Skype.

1:06:45 So On the one hand, you're like, oh man, that one point eight percent, like gosh, we need to own a lot more for this to be meaningful for our fund. However, since you were putting fift million to work that even if you got like a two X on that, which is Not great by venture standards for a normal early stage investment. But I mean that really is meaningful toward helping to return the fund. Yeah. Yeah. And they ended up getting what, like a four X on it?

1:07:10 A three X. Yeah. Three X. And it was quickly, it was just a year and a half. It ended up turning into a hundred and fifty three million for them. Yeah. So Couple things on this. One. Mark. There'd be no back to like, Okay, what are we all what are we gonna do here at Andrew Snore? This is gonna become a case study. So

1:07:27 He helps broker a Facebook partnership for Skype. Uh I remember this. Remember when Facebook integrated Skype for video calls? Win Messenger. Yeah. Man, huge. Could you imagine something like that happening today? No effing way. No.

1:07:42 That was all Mark. And then he helps recruit. Tony Bates. To come in. As the CEO, Tony Fri.

1:07:50 Cisco was a rising star there. And then in a later fortune piece that Market would place another great one. Talking about the deal. Quote The Clincher was Bates's meeting with Andreessen.

1:08:01 Quote I'd always been a big admirer. But never met him, Bates says of Anderson. Going into the entries in Horowitz office was an experience. They have this wonderful library in the lobby. And I looked for a couple books that were special to me.

1:08:17 One was Neuromancer by William Gibson. I couldn't find it. So that became a good opening to the conversation. Ah, and I think it's Mark's personal library is the library in the lobby. But you can just see the whole mystique, the firm, the franchise, all of this being woven together here. Yep. And it's happening. In public, in Fortune magazine. In the press. Yeah, so great.

1:08:40 Yeah. There's another great little end of this story, which is uh there's a blog post where Ben Horowitz said that the Skype deal generated a tremendous amount of controversy for us. That controversy ended this morning. And of course this is when the deal gets done.

1:08:55 What was it nine and a half billion dollars that Microsoft acquired it for? I think eight and a half, somewhere in that neighborhood. Oh, eight and a half, that's right. Still pretty pretty nice quick. Return. Unfortunately.

1:09:07 Yeah. Shortly after this, right around this time. I don't know, I keep saying the biggest mistake in the firm's life, but the reality is Instagram only got acquired for a billion dollars, like There are two mistakes. One Anderson screws up.

1:09:20 Not. Continuing to invest in Instagram. Two Instagram sells to Facebook for a billion dollars. Versus a I don't know, two hundred billion, five hundred billion, some massive company inside of Facebook that it is today. Uh Totally.

1:09:34 So sad. So that was March twenty ten. Fortunately though. Also in early twenty ten, They make a great decision.

1:09:43 Wait, David. I just have to pause for one quick second and say. Instagram was definitely not their biggest miss ever. Their biggest miss ever is definitely Uber, right? That's coming. Don't worry. Don't worry. Okay. Yeah. No, but you're right. Not the biggest miss for Andreessen, but Silicon Valley's biggest miss of the past. Fifteen years was Instagram being sold to Facebook.

1:10:04 A crude to Facebook shareholders, but not uh not the rest of the venture ecosystem. Totally. That's a whole nother rabbit hole that we've been down many times. So A great decision that they make in early twenty ten is they lead

1:10:18 The series A. Of Octa. The identity company. Which they would then own what, eighteen percent? At IPO?

1:10:26 I think Yep, they owned Just a hair under twenty percent pre money at the IPO before the new uh the IPO cash came in. So that And what was IPO valuation was six billion, is that right?

1:10:39 six billion and today it's what is it, thirty three billion. That company's continued to just be a monster. Yeah. So And this is out of a three hundred million dollar fund. So at IPO. Their stake was worth. Call it one and a half to two billion. Yeah. At IPO. At IPO in this one company. And if they've held to today.

1:11:00 Which it's unlikely given it was a fund one for them and Totally. And I'm sure, you know, they distributed it over time, so they probably captured some of this upside, but Just as a thought exercise, what twenty percent of or fifteen percent of That's what, five billion ish? Yeah. Yeah.

1:11:16 Not bad. Not bad. And Octa, this is another one that like Mark talks about publicly as we were totally laughed at. Identity providers were a thing already. And like Microsoft with

1:11:28 uh active directory like it was owned, but the CEO of Focta, Todd McKinnon, had this like big thesis around the shift of the cloud means that there's time for a new identity provider, there's room for a new person to come in and none of the incumbents are gonna be able to react to it. And Mark always talks about that like this is the kind of thing that we love hearing when there's like a rearranging of the technology paradigms that are used and right now it's just by a small select set of people, but over time everyone will shift to the cloud. But yeah, he said they were totally laughed at for doing the Octa deal because it was uh very against collective wisdom that that would be successful. Well, two things. One, it even goes deeper than that, because Tim Howes, who was early Netscape guy and then a co founder of Loud Cloud with

1:12:12 Ben and Mark and Sickery and everybody. He invented uh LDAP, the directory access protocol. So they knew a lot about this. And then the other thing. You know, just everything you said reminds me of the you know the classic Sequoia question, the why now. Why now well it was a great why now for Octa.

1:12:26 The cloud was changing everything. There were like a lot of companies and even for the next five years where Just saying, hey, we're gonna do a thing that's already sort of a settled frontier and a very settled frontier in the on premise world, but we're gonna bet big on cloud and we're gonna architect it in such a way that like We're not even compatible with the on premise world.

1:12:46 If they mistimed the enterprise shift to cloud. the whole thing would have gone under because there there would have been no way to be uh I'm thinking specifically of like a snowflake, the cloud based data warehouse. you had to be binary in your bet and say like we believe in these thesis at this timing and Obviously with Octa and Snowflake it paid off, but you know, with other cloud bets like Loud Cloud, it did not. The timing was not right. The why now was not Not.

1:13:12 Great. Well, actually it was great. It was a good story. It just didn't Play out. Well, So They're spending money as let's see, maybe their uh their VC enemies would say drunken sailors, maybe would be a good term at this point.

1:13:26 You know, we're still we're in like the early parts of twenty ten. They've done fifty mil into Skype. They've done all of these deals. They're doing tons of seed deals on top of it. It's a lot. They're almost out of cash. You know, and they're reserving half the fund for follow ons, so they only have a hundred and fifty mil of new money to deploy. So And uh so this actually just came out

1:13:50 Recently I I saw this in um I forget which publication this was in, but I quote recently. Dead. Then said in a this is a quote, Horowitz said in a recent clubhouse interview.

1:14:02 That when the duo were raising their first investment fund of three hundred million. A big sum for a VC firm at the time, indeed. Andreessen told him they needed to raise a second, much bigger fund right away. And here's a quote.

1:14:17 in fundraising and in venture capital. Strength leads to strength. Anderson said. According to Horowitz. It's so true. Oh such a good thing. Strength leads to strength. It's so true. It's so funny and it's so true. Have you read the Michael Mobbison paper on um

1:14:33 Persistent differential returns by asset class. I have. We'll put a link in the sources, but for those who haven't read it. There's all this data to support the fact that like you look

1:14:45 on one side of the spectrum are like hedge fund managers. And if you're the top performing hedge fund manager this year, it has almost no bearing on whether you will be a top performer five years from now, maybe not even one year from now. But if you look all the way on the other side of the spectrum at venture capital, and because he's a good academic, he doesn't presume to uh state the cause. He just states that there is a correlation, uh, that the top performing firms stay the top performing firms for a long time. You know, if you're the top performing venture investor this year, it's very likely that you will be 10 years from now. And so, or at least one of the top performing ones, and the sort of postulate is that well

1:15:22 Strength follows strength. That when you do the best deals, you then start to realize the flywheel of getting the best entrepreneurs that are referred to you. Totally. When this is everything that we talked about we s spent the last, you know, hour and a half talking about of like how are Mark and Ben gonna break in? to this dynamic. I mean I remember I I've maybe talked about this on an episode in the past, but

1:15:45 Back when I was a even younger whipper snapper just starting out in V C at Madrona I got a chance to get drinks with Bill Gurley once and I and I I was like so eager. Like you know, I had like all my questions prepared. You know, I was literally like I had like a notebook and The biggest one I wanted to ask him was like Bill. Tell me the secret. Like what is the secret to success in venture capital? And he just kinda looked at me and he was like David, the secret to success in venture capital is success in venture capital.

1:16:13 It's so true. You have success and that gets you more success. You don't have success? Good luck. And to Mark's point here, it also is true in startups. Like if you are massively outraising everyone else in your category. like you're gonna be able to kind of keep that mind share of the category leader. You're gonna be able to recruit the best executives. You're gonna be able to land those customers. So there is this

1:16:36 On the one hand, it's hype. And on the other hand, hype is a self fulfilling prophecy in a lot of ways. Totally true. I mean God, what a great Encapsulation of Startups and everything.

1:16:49 It is hype. But it's also real. Anyway, so They go out. Summer twenty ten. And they raise a second fund. One year.

1:16:58 After deploying an already large three hundred million dollar fund. They raise a six hundred and fifty million dollar second fund in twenty ten. This was nuts. This was like an atom bomb going off in the industry. Two reasons. A, that is so much money. I mean, when I was at Madrona the time, we were investing out of a two hundred and fifty million dollar fund.

1:17:19 And we were a twenty year old firm. It's still pretty closely after the financial crisis. Yeah, I mean twenty ten. Twenty ten. The pace, like the idea that you would Blue.

1:17:30 quote unquote blow. Three hundred million dollars worth of a fund in one year. And be back. A year later. To your LPs to go raise another fund. This was crazy. You know the

1:17:43 Established VC firms, they're still coming off the hangover from the dot com bust. Where they've stretched their ninety nine funds for like four or five six years. You know, we did that special with Oh, at Altos talking about How they had to stretch a fund. God, how long was it? Like six, seven, eight years before they could raise their next one?

1:18:02 So this is just like Wild what's happening here. And the press. It's it all. Up.

1:18:09 Now the other thing that raising now having almost a billion dollars in capital under management gives them is even more management fees. to go out and recruit more people. So this is when they go back. To market who's been. Just doing a bang up job for them on PR and they're like, Which we should say when you say a lot, like this is sixteen million dollars of new fees coming in every year, or about fifteen. So like you got a budget. Wow.

1:18:35 You got a budget. How about you leave Outcast and join? Andrew Snorrow, it's full time. Now this wasn't totally crazy because She had already sold Outcast to a holding company.

1:18:45 So she had founded it, co founded it. But it had been sold, and they just brought in a separate CEO. So she comes in. You know, full time joins as a As

1:18:55 Head of marketing for And Jason, I've no venture firm had a marketing before this. Uh they also bring on Jeff Stump to run talent. Uh they bring on John O'Farrell, who was head of Bis dev, I think at Opsware.

1:19:08 As a GP Now, interestingly he had not obviously been a CEO, despite the uh the mantra of you know, we only have CEOs as GPs here. But anyway. It works out well. So what do they do? You know, they've had the strength. They now have more strength. They keep the foot on the gas. They keep deploying

1:19:26 The money, quickly. So Early twenty eleven. This is crazy. And like totally works out great for them, but gets pilloried in the industry at the time. They take all this money, they start going and buying private Secondary shares.

1:19:40 in pre IPO companies like Facebook and Twitter. And Groupon, I don't know how well Groupon worked out for them, but They deploy What was I think like over eighty million dollars into buying pre-IPO secondaries. in these companies.

1:19:55 Wild. Which they probably were investing like exactly the upper limit of each fund in secondaries,'cause they weren't a registered investment advisor yet. They were just a regular venture firm. Yep, that makes sense. Which is what, twenty percent per firm is what you can do into Yep.

1:20:11 twenty percent per fund. So twenty percent of six fifty would have been like, uh, I don't know, hundred and twenty hundred and thirty million. So I bet they did. It's like up to that, give themselves a little breathing room. That's how you come up with the A D. Yeah.

1:20:24 It may have been more than eighty two. That may have been just Facebook. Anyway. So then In April of twenty eleven. They lead.

1:20:33 A Hotly contested series B. For a little gaming company making a game called Glitch. Tiny spectrum. Tiny spec.

1:20:42 Mark had invested in the seed for Tiny Spec, personally, and then in the previous fund, Andreessen Horowitz had put a little bit in in the A that Excel Had What? And of course the head, uh, the CEO of Tiny Spec. Historic.

1:20:59 Butterfield. Stuart Butterfield, I know that name. So shortly after Like very shortly after, I believe. Um Anderson Invest leads this round, this series B Stewart sends an email to the board. Quote.

1:21:13 We've had this quote unacquired before. I did not feel that we are pouring gas on a fire here. More like pouring good whiskey on a drugstore heating pad. It is unlikely to burst into flames. And he means that in a It uh bursting into flames being good for the company, not bursting into flames being quite bad for this new Andreessen Horowitz.

1:21:34 Investment. Well, I love dishonesty. I mean, it's great. Yeah, just you know, keeping it real. So he recommends you know they sort of all figure it out his board and and I think you know Mark's involved in all this and All right, well what else are we gonna do? We don't necessarily want the money back and you know, they pivot into By the way, this is why repeat entrepreneurs like there's a lot of th negative things about sort of like serial or repeat entrepreneurs that get a lot of criticism, like it's not their life's work, they've already made their money, there's a lot of like reasons to be a little bit careful. But this is one way Where it massively

1:22:06 plays to the company's advantage that Stuart from Flickr knew what bursting into flames felt like. You could call it escape velocity. You could call it getting real traction or product market fit or starting the fly, whatever it is. Stuart knew what that felt like, much like Mark did from his Netscape experience.

1:22:24 And this wasn't it. It was not it. No, it was not. So of course they pivot into this uh little front end that they'd built on uh Was on IRC, I think. IRC. Yeah, it was like extensions on top of IRC. Yeah, extensions on IRC for workplace communication that they were using internally.

1:22:41 Decide to call it Slack, they call up our our friends. Andrew and uh and the crew at Metal Lab. Andrew now, of course, of tiny capital. Get Metal Lab to design the UI, take it to market as a product called Slack.

1:22:55 Yeah, works out pretty well for everybody involved. That it did. And I threw out that three billion number earlier. A lot of these exit numbers are estimated since it's not like we actually know Andrews and Horowitz's returns, but we can back into it based on what we think they own from participating in various rounds or what they owned at IPO and when we think they may have liquidated Assuming that they held it from IPO to the eighteen months afterwards till the Salesforce transaction, it would have been about a three billion dollar outcome. So Uh very good decision for Andreason Horowitz to let Stuart keep running with the money, even though uh

1:23:30 You know, the game was not bursting into flames. Yeah, that's a good couple of multiples on that huge six hundred and fifty million dollar fund, too. How would they ever return that? Oh boy. And when you say how would they ever return that, that's'cause that was the like knock on Andreas and Harwoods at the time. That was the like bare narrative was like these guys rate this huge fund, there's no way. Six hundred fifty million dollar ventor fund can anybody return that amount of capital, let alone these new guys. So twenty eleven. Oh boy, what a schizophrenic year. Here are some of the investments that they made in

1:24:01 twenty eleven. Do you remember Shoe Dazzle? I do. Yep, shoe dazzle jawbone. How about that one? Oh yeah. That boy, everyone lost money on that. Oh boy. It was a great quote from Mark I forget where, maybe it was in the New York piece, uh saying that Jawbone is the new Sony. Ooh.

1:24:18 Not quite. I mean such a unbelievable cool technology innovation that just Yeah. Yeah. Uh Lightro camera, remember that one? Oh yeah. Yeah. Yeah.

1:24:28 How about this one? Fab.com. Jason Goldberg. Yeah. Ooh boy. That was a flame out, unfortunately.

1:24:38 And there was a lot of other big name folks. Speaking of Dick, Kevin Rose was involved in that one too. Oh, and Fab? Was he? Yeah, I bought some stuff on Fab. They had really unique merchandise. Yeah, I did too. It it was cool. But Man. Burn through a lot of money.

1:24:51 But it doesn't matter. 'Cause also in twenty eleven They bring on a new general partner. They bring on a few new general partners, I think, but one in particular Jeff. Jordan.

1:25:02 Boom. Wow. So Jeff. I believe started his career in the Disney the famous Disney strat planning group. I think he worked for Meg Whitman there. Hm, I didn't realize that. Yet another that's quite the mafia.

1:25:14 Yeah, totally. I think that's how he if I'm remembering this right, I think this is how he ended up at eBay. And of course at eBay he was North America GM and then championed the PayPal acquisition and ran. PayPal within eBay. Well pretty good. Then after that, remember he left and became CEO of Open Table and

1:25:34 Who was Open Table's main venture capitalist and board member? Bill Girly. Ah. Wow. The bet noir of Andrews and Horowitz.

1:25:46 Uh but Jeff One of the best consumer investors of the last Decade at Andrews and Horowitz. He would go on to do the Airbnb investment, right? Oh yeah, in twenty eleven, right after joining. So I believe the first right after joining.

1:26:02 Interest. Wow. Pretty good. Then Airbnb. Then Instacart.

1:26:08 Then a firm a couple years later, many others. He's done so well that in twenty nineteen He actually became a managing partner they made him a managing partner of Andrew Snar, what's the firm, alongside Mark and Ben and Scott Cooper.

1:26:22 Hmm. Also not managing part, but more like the COO of Andreason. And I get the sense it's sort of the four of them are like really the sort of stewards of the firm at this point. Yeah. Oh, that's a good word. That's uh you know, that's what uh

1:26:34 Sequoia calls the yeah the Sequoia Storage. They're the four stewards of Andrews and Horowitz. So quick recap. This and this is just a small sampling of the twenty eleven deals at Intrus and Horror. It's Carding to pitch book.

1:26:47 Shoot asle, jawbone, bump. Lightro, Fab, Airbnb, Pinterest, Stripe, Niceera, Tiny Spec, Facebook, Twitter. Groupon. What a collection. Whoa also they did stripe? They did, the seed.

1:27:00 Uh but they were part of the scene. Fascinating. Yeah, man, slugging percentage not Batting average. But Ben, you've already you've already alluded to it, you've already spoiled.

1:27:11 The biggest mistake in the history of Andre Snorowitz that they make in twenty eleven. I was gonna ask if you knew what it was, but obviously you know what it is. Which would lead to a subsequent success, like a multi billion dollar success, but Yeah. Uber. Fall of twenty eleven. Oh, this is brutal. Bradstone does great reporting on this in the upstarts.

1:27:31 Andrew Snorowitz is in line, specifically Jeff Jordan. Man, could you imagine what a monster year it already was for Jeff. Pinterest. Airbnb. All in the same year. He's in line, handshake on a deal. to lead Uber's series B. And of course, who is Uber's series A investor? Benchmark. Benchmark and Bill Girlie. And you know, we've got this huge feud between the firms, but like, hey, you know.

1:27:56 Bill Garley was on Jeff's board, like They're great. They know each other. They're great. We're gonna we're gonna make the peace here. Hand shake deal, it's all done. Jeff is gonna lead it. Hot streak is gonna continue.

1:28:08 Mark's involved. Everybody's shaking hands on a deal at a Slightly over three hundred million dollar post money valuation. For Uber's series B.

1:28:19 God, this reminds me of the Berkshire episode when Warren buys Berkshire. Oh no, it's brutal. God, it's so brutal. So Somebody and Brad kinda implies in the upstarts that it was Mark himself. Starts to get cold feet.

1:28:35 About. The deal. He takes Travis. Out to dinner. And he tells him at dinner.

1:28:42 They still want to do the deal. But they can only do two twenty post. Not three oh five or three ten or whatever it was supposed to be. That's a pretty big haircut. It gets worse.

1:28:53 supposedly Travis was still gonna take the deal. He really wanted Andre Son Horowitz. To be The lead. He like all the marketing had worked. He was gonna do it. But then the actual term sheet arrives and in the actual term sheet they must have really had cold feet. Like they

1:29:10 They didn't want to do this deal. This is half assing your way into a term sheet right here. This is limping across the finish line if I've ever seen it. they put a huge new option pool refresh in there. Which of course would dilute. in existing shareholders and and particularly the entrepreneurs.

1:29:27 Even more. And that's the straw that breaks the camel's back, Travis is like pff He he very politely tells them he's not gonna take the term C Typical Travis fashion. Uh nope, scorched earth. B mistake. Big mistake. Is it Menlo that ends up doing the deal? Menlo, who was supposed according to Brad, the stalking horse for the deal. Uh on valuation. They come in, they're like, Oh yeah, we'll do. We'll do you want over a three hundred post? No problem. We got that. Uh which ironically is The Andreessen Horowitz playbook that's gonna say cashing them on. Right, Andreessen Horowitz has conditioned us all that we can pay fifty to a hundred percent more than we thought for deals, and you know, not only will we win them, but that may actually work out for us well in the future. And it worked out real well for Menlo.

1:30:14 Not Andrew Snorowitz. So sad. For Anderson. Great for Memo. Of course they would go on to invest in lift and own Go look at my uh my best guess data here.

1:30:25 I think they owned about six percent at IPO. And so If you think about like when the lockup would have ended, it'd be about a sixteen billion dollar market cap. At that point. Like

1:30:39 They ended up with a billion dollar stake of lift at the time that they could liquidate. And you know, if you want to get really nerdy about this, we covered this, of course, on our Lyft in Uber episodes back in the day. You know, at this time. While this series B is happening, Uber's a black car company. Like nobody's doing peer to peer ride sharing yet.

1:30:56 Nobody. And it wasn't until twenty thirteen when Lift would be the one that would pioneer Take the Homobile's playbook and Do true peer to peer ride sharing. And that's when and Jason invested in left, they saw, you know, the future. And then Uber launches Uber X and the war is on.

1:31:13 Exactly. Don't really want to cross uh Travis Kalanick. But just to be like super crisp about this. It's a huge huge loss. Like sure, lift ended up being worth sixteen billion dollars. Uber at that point was worth

1:31:27 eighty billion. Yeah. I mean, it would have been a completely different fund dynamic if they were an Uber instead of Lyft. Totally. Huge loss. Man, twenty eleven, what a freaking year. For tech period, but also for Andrews and Horowitz, do you know what else.

1:31:44 happens in twenty eleven. Ooh. Literally right before the Uber deal goes down, which just makes it all the more mind bending that Mark would get cold feet here. No. Software is eating the world.

1:31:57 Oh my gosh, that's when he published the op ed? August twenty eleven, right before The Uber deal goes down. Yeah. Op ed in the Wall Street Journal.

1:32:07 Crazy. I mean the piece itself, like it's kind of a masterwork of arguing this there is no bubble thesis. I mean, at this point in time People still Think like, you know, tech is overvalued. You know, we're still in the shadow of the financial crisis. You know, Mark talks about in

1:32:24 The piece. He says this is a quote. Today's stock market actually hates technology. As shown by the all time low of price to earnings ratios for major public technology companies.

1:32:37 Apple, for example, has a PE ratio of around fifteen Point. Two. The same as the broader stock market, despite Apple's immense profitability and dominant. Market position.

1:32:49 Yeah, I mean crazy today Apple's PE ratio is thirty two and a half, Microsoft is thirty nine, Amazon is sixty nine. The market did hit tech or just didn't recognize tech at this point in time. Which is fascinating because those companies did have unbelievable gross margin profiles and continually high growth rates for public companies. So it is uh I mean not as high as they have now. Like it's crazy to watch all these companies continue to

1:33:14 grow the rate at which they're accelerating even today, even later in their life. But Yeah, at that point he's Totally right that

1:33:22 investors in public markets hadn't really realized this about tech companies yet. The other thing that He sort of sharpens his pencil on this point later. I don't think he makes it as directly in the Software is Eating the World thesis. But He now argues, look, compute costs are just going to zero. Like

1:33:38 truly it's going to asymptotically approach zero. And so At some point, if you have infinite free compute, which we should say. Like that does require continuous innovations in energy because it does take a lot of energy to do stuff and that's the big knock on crypto. But hey, Moore's Law. Let's make the assumption that compute asymptotically approaches a cost of zero dollars, then truly

1:34:03 software can just continue to the question becomes, what's the interesting thing that you can do with software, even if you have to have it do a lot of compute to do the thing that you want it to do. Well, the thing is so cool that I didn't put together until doing the research for this episode. Remember last time We talked about The Mike Moritz line that I don't think is public. I think it's kind of more like an internal Sort of square saying that um

1:34:27 Every successive generation of technology companies should be an order of magnitude. Bigger because of Moore's Law, because the cost of compute declines. That means that you can address every successive generation can address an order of magnitude, more industries, more people. And thus the outcome should be bigger and every fund's performance should

1:34:47 Surpass the last. Hm. It's the same argument as Software is eating the world. It's exactly the same argument argument. Compute cost declines, and Mark says in the piece. More and more major businesses and industries are being run on software and delivered as online services from movies to agriculture to national defense. Over the next ten years, I expect more industries to be disrupted by software with new world beating Silicon Valley companies doing the disruption in more cases than

1:35:14 Not. Huh. That's exactly what happened. The only thing I will disagree with in your Comment is that every successive generation of funds should be that much better than the previous because as we've seen, even in the earliest stages. Price goes up.

1:35:28 And so your entry point continues to be higher and higher, even though as you're pointing out, your exit value or the addressable market of every single company continues to be greater and greater as software companies. Look at you making the anti entry Synhorowitz argument. Someone's got to make it here on this side. I love it. I love it. Optimistic program. So great. So great. And also then there is this question of like will that always be true? Like there's three billion people on Facebook now at some point If you saturate the entire global population with compute at their fingertips,

1:35:59 and you take up twenty four hours of their day. and you have one hundred percent of their value creating activities, aka their jobs running on software, like at some point Especially because the population's not growing. it would seem that you no longer have an order of magnitude greater addressable market than

1:36:20 in the previous year, but we're probably very far from that horizon. Or an order of magnitude more than the previous decade. Well, and I think it it looks like now. That crypto is gonna be the next answer to that, right? Like What is the next value of Moore's Law accelerating and decreasing? You know, you said like a lot of energy. Ooh, David Rosenthal calling it here on air.

1:36:39 Well I think Andrew Zanorowitz has been calling it for a while, so twenty thirteen. So back to that. So after Software is eating the world at the end of twenty eleven. In January twenty twelve, they go out and they raise fund three.

1:36:55 One and a half. Billion dollars. Oh my gosh, get at me. You thought we were big before. Watch this. Watch This So

1:37:04 That one and a half billion dollar fund. Get this. was seven and a half percent of All of the venture money raised globally. In twenty twelve.

1:37:15 Whoa. One fund, one firm. Wow. That's wild. Isn't that crazy? It's interesting'cause it's basically like

1:37:24 In a lot of ways, Andreessen Horowitz was Just slightly out of step. with the growth of the rest of the venture ecosystem. And they took advantage of these like arbitrageable moments where like the one that you were talking about, where they realized Wait a minute. There's actually

1:37:41 Less risk in series A. than there used to be. Because there's all these seed investors. So therefore we should invest at series A 'Cause we can kind of get paid too much in equity for the risk that we're taking. Or more appropriately, other people are getting paid too much in equity for the risk that they're taking, so we can price higher.

1:37:59 And they're kind of doing it again here, where this is really like two years before the race is really on in raising massive, massive funds. So they can kind of play that to their advantage too. Yep. And what's the other piece of the arbitrage here? It's the summits, it's the TAs, it's the Silver Lakes. So, you know, they raise a one and a half billion dollar venture fund, seven and a half percent of all venture, you know, money raised in twenty twelve, but a big portion of that Isn't

1:38:25 Going to venture in the same way. So Pretty quickly after they raise the fund, they do At the time, you're like, this was not hundred million dollar series A in GitHub. GitHub, that's right. GitHub, yep. And that was like the first real capital that GitHub had raised, right? It had been bootstrapped all the way. Yeah, yeah, it was the first real capital. So this wasn't a series A. You know, this was the type of deal that a a generation earlier, you know, Summit or Insider or Silver Lake or whoever would be doing. And this was like the largest quote unquote series A ever. Oh, masterful PR and branding of this as a series A. There's no way in hell this was a series A. But

1:39:01 Anyway. I think they bought of the company or something. Yeah. I think even more. I think it was a seven fifty post money valuation. So that sounds familiar. Yeah, whatever, you know, slightly more than ten percent. I do know that they would end up making a billion dollars on this in this the ultimate sale to Microsoft in twenty eighteen.

1:39:20 Yep. So that almost returns the whole fund, right? I mean, this is how That type of investing works is like very low downside. You know, still pretty high ups. I mean they 10x that money, right? Yeah, again, going back to before a ten X

1:39:34 actually not interesting to an early stage investor. You kind of need to be in that 50 to 100x territory to make the portfolio math work for that to be the big winner in the portfolio. However, if you're investing a hundred million dollars out of your$16 billion fund, Then like That hundred million ten Xing. very impactful for the fund. Very impactful. Yep, totally.

1:39:57 So Later in twenty twelve. Chris Dixon. Joins. The firm.

1:40:04 And uh Chris, of course, was you know very, very well known New York entrepreneur, venture capitalist. He started SiteAdvisor and then Hunch, which was acquired by eBay. He'd started Founder Collective, the seed VC firm. He'd been part of Bessemer. earlier in his career. People I remember it'cause I used to live in New York. People really identified him with like New York. Venture Capital.

1:40:26 He's like Going to Silicon Valley. Join in Andre Snaro. It's this was big news. And shortly after he gets there. In twenty thirteen. He leads.

1:40:37 Series B. Coinbase? Twenty five million dollars in Coinbase at a one fifty Post. Wow. Oh man, really overpaying for that one. Hundred and fifty posts, what does this thing even do?

1:40:49 Crypto. Here's the kicker. Over the years. Andreason Horowitz would keep buying shares from other investors.

1:40:57 So other early investors were selling shares, including USB and and others. And Andreessen was just buying, buying, buying, buying. Man. I mean this is like Ventures of power law. We're talking about so many great outcomes here. Like this one dwarfs everything. Everything else. At the DPO.

1:41:14 Andrew Sonoro, it's his steak. earlier this year in Coinbase is worth eleven billion dollars. Oh my God. That's seven X. That entire one and a half billion dollar Fund like Oh my god. Thank God for the investors in that one point six billion dollar fund that that Coinbase investment was out of this fund instead of one of the smaller funds because

1:41:36 Returning a 1.6 billion dollar fund, no easy feat, But if you have one eleven billion dollar return in there. Okay. Yeah. And this is the whole thesis, right? There's like these outcomes are bigger than you think, there is no bubble. These valuations are not just justified, but like the crazy prices we're paying now, we're getting the deal. Wild.

1:41:56 It's wild. They invest all told in seventy six new companies in twenty twelve. In twenty thirteen they had another ninety seven New. Companies. Including

1:42:07 Lift. And Pager Duty, which is gonna be another great win for them. Robin Hood. They only do the seed in Robin Hood, I think they don't. Continue until I think that's right. I think until like twenty twenty or something, and they did it with the growth fund. Yeah, yeah. Oculus.

1:42:22 By the way, all this great data that we're finding from our friends of the show at Pitchbook, just an awesome resource for digging through this and figuring out who participated in what round. Totally. Oh, so great for this episode. Data breaks. is in twenty thirteen. Which is still private, but that's gonna be a monster for them. Most recently valued at twenty eight billion. They led the seed round and have participated in I think every round since. I bet they own a ton of that company. I bet yeah. Can't wait to see that.

1:42:49 S one. Uh I just love this episode. We've got so much great stuff and we've got to so much funny stuff too. Uh Zenophits. That was twenty thirteen. Oh, I forgot they were in Zenith. Oh, they were the big ones in Zenopitz. They were

1:43:03 They were holding that bag for sure. Clinkle? Remember Clinkle? Oh yeah. Uh one of my T S P classmates spent his uh summer at Clinkle. He didn't go back full time. That was a good choice. And then the kicker. This may be my favorite part of the whole episode. In twenty thirteen.

1:43:20 They banned. Together. Band of brothers, three musketeers, it ends up being called. With Google Ventures and Cliner.

1:43:29 Perkins. To create The Google Glass Collective. Oh boy. This is the most ridiculous thing ever. It wasn't a fund. It wasn't like a like their crypto fund or their bio fund that we're gonna talk about in a minute here. It was a collective. Where the three firms said they were gonna share Google Glass related deal flow, but no actual commitment to invest in Oh my God. What

1:43:54 That's an incredible PR like to be able to plant that story is is impressive work'cause like that's a non story. It's a total nonsense. Like I agree to share deals with other investors all the time. That's a non story. So there's you know huge press release, there's an event. Uh big tech crunch piece.

1:44:12 Money quote from Mark Andreason in the tech crunch piece. You put on glass and you say yep. That's the future. Yep, that's the future, Mark. Can't win them all. Can't win them all. I do legitimately think augmented reality, both visually and audio, is

1:44:31 the next big compute platform. Oh, totally, yeah. But Was Google Glass no. Uh, they're so great. We tweeted the photo of

1:44:39 Bill Maris from Google Ventures and John Door. From Kleiner and Mark Anderson wearing. Wearing the Google Glasses and posing on sand hill. Oh my God, what a classic photo. It's just great.

1:44:53 Despite all that. Things continue to go pretty well. In uh twenty fourteen, Mark gets really into Twitter. He tweets something like that. It was over a hundred times a day. Despite being an angel investor in Twitter, he had only tweeted twice.

1:45:07 before twenty fourteen. I remember thinking that was ridiculous back in the day, that like all these people who were talking about how they invested in Twitter and blah blah blah. had never actually participated on the platform. I think Fred Wilson was the only one who like Actually was active on the platform.

1:45:23 But then for whatever reason in twenty fourteen Mark decides Oh yeah, I'm gonna get really into this. He tweets like twenty thousand times in six months. It's wild. And he was like the best person to follow'cause like If you were interested in

1:45:36 mental models and exploring wacky futuristic ideas like it was a buffet table of that. Yep. He actually People, you know, of course. Also creates.

1:45:45 Press and everybody wants to know why is he tweeting so much and like It's so great. And he says in some interview, he says he loves Twitter because Quote reporters are obsessed with it. It's like a tube and I have loudspeakers installed in every reporting cubicle around the world. So great.

1:46:03 Uh March of 2014, they close another one and a half billion dollar fund. Just a little over two years after Fund three, the one and a half billion dollar fund. So assets under management here are about four billion. Yep.

1:46:16 They do Instacart, they do Reddit, they do Magic Leap. They uh Do all sorts of stuff. Interestingly though, the pace actually steps down a little bit. They stop doing quite as many seeds. During this time period. They've now since stepped back up the seeds, but I think Maybe they started

1:46:35 Listening to Folks about the signaling talk, or maybe entrepreneurs were Actually Listening to the signalling effect. It was resonating with people. I mean, David, like to recall a conversation we had when you were starting your venture firm in when was that, twenty sixteen? Two, twenty eighteen, yeah.

1:46:53 This was part of the thesis. You were like, Well, no one wants to raise seed rounds from the series A firms because of the signaling risk. So we're a pure play seed firm and I think that makes a lot of sense and and that was the professionalization of the asset class of seed. happened because Of that. Of the signalling effect. Yeah. Yeah.

1:47:11 Totally. It's just so funny, it's completely disappeared now. Yeah, well, in so many ways everyone has followed Andrews and Horowitz's lead in truly every way. The one that we're describing here is kinda shrugging a little bit on

1:47:26 what stage is the right one for me and how much do I need to stick to my knitting and You know, how much does signal matter? Yep. So okay. In twenty fifteen. Finally.

1:47:37 The New Yorker piece comes out. It's so good. It's so damn good. You gotta go read it. Tomorrow's advancement. Uh Tad Friend is such A good writer. And this is like, you know, once every

1:47:51 year, couple years, the New Yorker is like, We're gonna do a profile on an industry. And they they talk about this on the on the A Six T C podcast and like I think it's the episode with Margot, like the opportunity to have The profile on Venture Capital. In the New Yorker. And to have Mark Andrews in B.

1:48:09 Like the mouthpiece for it. Oh, it's so great. So I'm I'm just gonna It's okay, can I read a couple of lines because these are Please do? These are so good. Okay, so first off, the piece starts off. With a little vignette of mixed panel, which of course was a big interest in investment. And uh

1:48:25 Talking to the founder, Suha El Doshi. Yeah, about his experience raising bunch of capital and whatnot. And he says, Oh, this quote is so good. Mediocre VCs want to see that your company has traction. The top VCs want you to show them. That you can invent. The future.

1:48:43 It's so funny and it's so true. Oh, it's just great. Let's see, Andreessen and Horowitz modeled their brand strategy not on the industry's elite, but on Larry Ellison's Oracle and its aggressive marketing during the enterprise software wars. For one investor in their funds. Princeton University's chief investment officer, Andrew Golden.

1:49:02 It became a running joke how long it would take other firms to complain about Andrews and Horowitz. In the early days, it was within two minutes, he says. Uh here we go. This might be my favorite part. One morning. As I sat down to breakfast with Andrewson.

1:49:20 A rival VC sent me a long email about A sixteen Z's holdings. The VC estimated that because Andreessen's firm had taken so many growth positions, its average ownership stake was roughly seven point five percent. Actually, eight percent. Which meant that to get five to ten X across its four funds, you would need your aggregate portfolio to be worth two hundred and forty to four hundred and eighty billion dollars. How could that possibly be? I started to check the math with Andreessen.

1:49:54 He made a jerking off motion and said, blah, blah, blah. We have all the models. We're elephant hunting, going after big game. Oh my god. A that arrival VC. would take the time to type out a long email. And would take the time to have themselves or an analyst go model out a different firm's average ownership. Are you kidding me? So great. Uh great and and model out close enough to be within half a percent of the actual total.

1:50:24 And wait a minute, so it's actually an interesting question. So they would need what were the numbers of how much market cap in aggregate would need to be created? Two hundred and forty to four hundred and eighty billion dollars of market cap. So you got coinbase at what is it, a hundred? Right around a cool hundred. You got

1:50:43 Roblox at 45, so that's 145. You got Okta at 33, so that's around 170. Yep. You got Slack at twenty four. No. Something like that. Let's take it to two hundred. Okay. You got Airbnb. That's another Hundy right there.

1:51:01 Yep. You got Pinterest, which is another forty five, fifty. Yep. All right, so we're at three fifty. So like you can see sending that email being like Uh

1:51:11 good effing luck. And like you do look at the companies they've invested in you're like Yep. They far surpassed that. And like we haven't talked about Instacart or Databricks or Robin Hood or and of course these are smaller positions, but yeah. Yep. Uh it's so so good. And then Mark's response. Makes a jerking off motion with his hand. It says we're elephant hunting, we're going after big game.

1:51:33 That has to be the first time that was printed in The New Yorker. The New Yorker. It must be. So great. Yeah, I mean, well the interesting thing is the whole industry seems to massively

1:51:47 Get whiplash from some new disruptive entrant. Often who's writing bigger checks and has a bigger fund, and the first reaction is Oh my God, complain about them. See Tiger today. Exactly. It was Andreessen Horowitz, and then it was Softbank, and then it was Tiger. And like, at least with Andreessen Horowitz, and it seems like I don't even information that's not public, but like it seems like with Softbank Vision Fund one, like strategy worked a heck of a lot better than people thought it was, at least a lot better than the media was reporting. So

1:52:15 I don't know. I suppose the next time my knee jerk reaction is to be like, Oh, these new guys are they don't know what they're doing and they're like being irresponsible and they're blowing us out of the water, like maybe think twice. about just complaining and figure out, okay, how do I actually need to adjust my strategy because maybe this is gonna work. You couldn't have teed me up any better here. Back to the New York article. His quote.

1:52:38 A sixteen Z services model made a strong impression on Sand Hill Road. Andreessen caused us to up our game on the marketing side, said Sequoia capital is Duglione. Oh.

1:52:51 Younger founders pay attention to media and we don't want to be depositioned. Sequoia hired. an in house publicist and two new marketing specialists. To compliment the four it had, and And most top firms made similar moves.

1:53:06 Even if they primarily believed that A sixteen Z's services were simply. A marketing tool. Uh. So Doug, so Sequoia. Like we're not gonna be depositioned. Like, yes, this is a good innovation. We're gonna adopt it.

1:53:19 Yeah, it's uh Bill Gatesy in in that way. Yeah. Totally. I can't wait until power to talk about this one. It's so interesting to me that This

1:53:29 caused effectively margin compression in the venture capital industry. Ownership compression. No, I literally mean margin compression and how profitable it is to be a general Oh, you mean the management fee side of the thing. Yeah. Like it's hard to run lean. as a big firm because you kinda need all this stuff to be competitive and that stuff is really expensive. It's a big team. You can't just take home 10 million dollars in fees every year. Even if you're Sequoia, you need a big team. Yeah. Totally. And so you end up with this fascinating dichotomy. It's the same thing that's happening in the media ecosystem. Where like there is no more middle. If you are gonna be one of the few who succeed and you're big, you gotta have a

1:54:11 Big ass cost structure. Yeah. Andreessen Horowitz is the New York Times of Venture Capital. And simultaneously it will be true that there's this long tail of people that are like F that big cost structure.

1:54:23 I'm gonna start kindergarten ventures and take my small amount of capital and like no team. And I'm gonna play a completely different super niche game. And there is some room in the middle, but there's not the room that there used to be in the middle. Yep. And

1:54:39 You know, I think the industry is Found that out painfully. Over the last ten years. Yeah, but this really interesting thing of like it took a long time. It took thirst or forty years of venture capital as a Professional.

1:54:54 for the arbitrage of profits to go away from General partners. Yeah. So flip side of this coin both on the the staffing and the services side of things.

1:55:06 But also on the deals and the valuations front. And just like the support. Yeah, it just like beats me over the head. And you know, maybe this will sound biased towards interest or Howitz, but i I'm not trying to be. I really just like Doing this research, thinking about the last ten years.

1:55:21 There is no bigger winner. In all of this. Than entrepreneurs. Oh, for sure. Oh my God. Like you used to be giving up twenty five, thirty plus percent of your company at series A.

1:55:33 And getting like two million dollars for that. And like somebody sitting on your board doing something maybe. You're absolutely right. I was talking about the margin compression in fees. Now let's talk about the margin compression in returns. Yep. Everyone's cost basis is higher because there's way more capital competing to go in. So therefore your ownership percentages are going to be less for the same amount of capital that you wanted to put to work. Well, and even on the fees side. V to be entrepreneurs. They're just getting a lot more.

1:56:01 You can argue all you want and people do about how valuable these various services are and whatnot, but like I think it's pretty valuable. That somebody Andreason Horowitz in the lead, but now the whole industry. is out there just like banging the drum about how great startups are and like how great their portfolios are. And like if you're an entrepreneur, why would you not want somebody championing you?

1:56:24 And in a way that's gonna be so hard for you as a founder of a small company to do. You're not gonna go get a profile in the New Yorker. But Andreason is, and they're gonna talk about how awesome you are. Yeah, it makes the most sense for these things where it doesn't yet make sense for a startup to have that competency in house. So having access to a fractional resource of that competency, who's a specialist and one of the best in the world at it, and really highly paid who you couldn't afford. for how sort of tiny and pathetic your company is, which all startups are.

1:56:53 It is an unbelievable boon to get that. So not only Are you facing less dilution and getting more capital than you ever used to before, but you are also actually getting a far superior product to what you used to get. That sounds like our uh cap chase ad read from from last season. Uh I love it. I love it. One playbook theme I wanna highlight here, and we'll talk about this again at the end, but Anytime your name is on your competitor's lips.

1:57:20 You're winning. Like you're winning. Like it doesn't matter what they're saying. Yeah. If they are talking about you Good, bad, ugly, and different, you're winning. You should just keep doing what you're doing. Particularly when they're the most successful incumbent of all time, with Sequoia. So okay, after that, later in twenty fifteen, they raise a two hundred million dollar biofund

1:57:39 June of twenty sixteen. They raise another one and a half billion dollar court fund. Twenty seventeen, they raise a four hundred and fifty million dollar second biofund. Twenty eighteen first three hundred million dollar crypto fund. led by Chris Dixon and new GP Katie Hahn. Who

1:57:58 Interestingly, I didn't know this about Katie till doing the research. Uh do you know what her background was before she Joined. She was a federal prosecutor. at the DOJ and she led the Mt. Gox case. Whoa after that.

1:58:13 Coinbase recruited her to join the board of Coinbase. after the Mount Gox to Bach'cause they're like, look, we're Coinbase, we're like doing this above board. We're the right way to do this. And so that's how Chris met K and then She came into Andreessen. Super into man. Crypto is so different than the rest of

1:58:30 The start up ecosystem. Totally. Let's see. Twenty eighteen. Also in twenty eighteen they launched the Cultural Leadership Fund. Which got a lot of like blowback at the time and I

1:58:41 I think was Pretty misunderstood. I think it's actually a pretty good idea. Twenty nineteen. They split the main fund.

1:58:49 Finally into separate funds for early in growth. Seven hundred fifty million for early. Two billion dollars. For growth. And then twenty twenty, just one year later, they're back in the game with One point three billion dollar mean Early fun seven.

1:59:05 Three point two billion dollar growth fund two. Seven hundred fifty million dollar Bio fund three, five hundred and fifteen million dollar crypto fund. Two. That is six billion dollars. In total across a suite of funds raised in twenty.

1:59:18 Twenty. Strength follows strength. Dang. And then this year, of course, in twenty twenty one, they added another two point two billion dollar crypto fund three bringing total capital under management two

1:59:32 Just a hair under Nineteen. Billion. Dollars. All right listeners.

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2:01:27 All right, other things that I pulled from Pitchbook about the firm today. So they made us this great tear sheet that we'll have to see if we can share this in the Slack because it's a great set of data on the firm. They did a little under a thousand investments in a little over five hundred portfolio companies total. They've produced a hundred and sixty exits, twenty of which were companies going public. There's now twenty two GPs with the addition of of a new New York based GP. The first time there's been someone

2:01:56 Outside. of the Bay Area. Another friend of the show. David Haber. And uh David, as you mentioned, nineteen billion here under in assets under management, eight network teams. Two hundred and twenty people now work at the firm. So to give you a sense of like

2:02:13 They've got twenty two GPs, but that means that ninety percent of the people who work at the firm are not GPs. So they've got a big investment team, but obviously these these network teams have grown meaningfully. And I also was talking to some folks that did a lot of hiring outside of the Bay Area during COVID. So as much as they were sort of one of the champions of Bay Area for life. Uh, and if you're serious, you invest here and the best companies are created here, blah, blah, blah. The last year has like really changed that. And not only are they investing in more places, but they actually have staff in more places and have adapted the culture and the processes internally to be hybrid. Then Also.

2:02:51 We debated. Including all this in the History and facts. Uh I think for Length if nothing else, but also to do it right.

2:02:58 We're gonna do a different venue to talk all about this, but They've also built a media company. Yeah. Alongside all of this. Yeah, absolutely. Yeah, there's a whole sort of forward looking view of A future looking view, one might say? Yes. I was trying to avoid

2:03:15 Let's call it lowercase future looking view. not only of the media company, but like other things that they're doing that transcend being a venture firm with value added services. And I think as Mark recently coined it, and he had a great invest like the best episode on this, HP two point oh. And there's definitely a lot more. That we'll talk about there, probably in a future episode at some point. Yeah.

2:03:37 I think that's the right way to do it. So yeah. That's Andrew Horwitz. Oh yeah, wait. There is one more piece to talk about. So there's this great saying inventor.

2:03:49 That Is also a Mike Moritz phrase. He's just so he's so good. Uh, which is that the apples take longer to ripen than the lemons. Of course, Apple's being a double entendre, meaning like good companies, but also, you know Apple. Uh in Sequoia's case.

2:04:06 So good. They start having some success. So April. Twenty seventeen. Success on the like

2:04:13 Distribution front. Octa IPO, March twenty nineteen, lift IPO, April twenty nineteen, page of duty, Pinterest. June twenty nineteen is the Slack DPO. December twenty twenty Airbnb, January twenty twenty one affirm, March twenty twenty one Roblox, which within a year they turn around like a Fifteen X on that.

2:04:33 Yeah, here I actually calculated that. So their initial investment into Roblox, which I think is out of their their late stage fund, the growth fund. Somewhere between a hundred and a hundred and fifty million, it was a hundred and fifty million dollar round at a four billion Dollar valuation. Ooh, so great.

2:04:50 Uh big shout out to Ho and our friends at Altos. Totally. Probably about two and a half percent. of the company at IPO, which of course is a forty five billion dollar market cap today. So pretty quick turnaround for that.

2:05:04 hundred to hundred and fifty million into one point two billion dollars. Yeah. And then the big one. April twenty twenty one. What's that, seven years after the initial investment? And Coinbase.

2:05:17 Coinbase. Damn. Eleven billion dollar. Stake that Anderson Horowitz.

2:05:25 hasn't coinbase. Which I think is an even better outcome or it's about on par with what Sequoia had with Airbnb, if I'm remembering right from our episode there. Yeah, it sounds about right. Maybe a little less I wanna see Sequoia had like a fifteen ish percent stake in Airbnb, thirteen, fifteen, something like that. But I I seem to remember this like ten to twelve billion dollar absolute dollar return. That could be, but it Airbed up to around a hundred billion. I think it might be back down a little bit now.

2:05:57 Anyway. We're splitting hairs here. These are pretty good. In any case, one of the single greatest venture capital returns of all time. Yeah. Hard argue.

2:06:07 Well We're definitely gonna get to grading a little bit of math. It's Napkin math, but I think it's interesting to sort of review this. But let's do some analysis first. narrative section. What's the bull case and what's the bear case on Andreessen Horowitz moving forward? Let's start with the bull.

2:06:24 I think we just painted the bullcase, right? Uh Well okay, okay. Uh bullcase. I got two bulkcases. One crypto. I mean if you believe crypto is the next I wrote two and you just got the first one.

2:06:37 Okay. Next Bullcase I would have. Uh I'm curious if you'd have this as well. A sixteen Z. has been

2:06:45 Pretty adamant, like you said about like Bay area, and in particular about western technology companies that they invest in. They haven't touched it. China, India

2:06:55 Et cetera rest of the world. No reason to think that their brand couldn't extend. So that feels like a green shoot. For them. Those are the two off the top of my head. I like that. I didn't have that the second one I had is this sort of HP two point oh notion of

2:07:11 You know, in the old days before there existed a startup ecosystem where you could get funded by venture capitalists to go and pursue your idea, you would try and rise up the ranks of an HP or one of these companies as an executive to go and and invent the future. And HP was the one hundred percent owner of every division. GE was the one hundred percent owner of every division of their company.

2:07:33 obviously taking minority positions is different. But Can you sort of be more of the Hewlett Packard in their heyday. if you aren't the majority shareholder of these businesses, can you still find a way? And now we're we're drifting into Kleiner Perkins territory a little bit, but can you find a way to both provide the services, find synergies between portfolio companies

2:07:55 And really like find leverage from your own scale such that you can find economies of scale across the different companies. And by that I mean does everyone really need their own totally separate finance team. Like at some scale, probably not. The same kind of thing that you see in industry consolidation when one company buys another. I'll be very curious if They sort of transcend the We help you out with part time resources.

2:08:22 thing in their networks to see if there's some way where like actually some part of the fundamental operations of the company. are happening at the venture level. Interesting. It's kinda like an

2:08:35 Maybe sort of like an actual fulfillment of the um You know, the CIA dream execution machine thing. Hm. 'Cause the CAA package like Jurassic Park, you know, the the packages that they were putting together The talent

2:08:49 You know, they weren't doing any like Part of the reason CIA had to exist was like They're not gonna pull together like I don't know. I don't know what goes into making a movie, but I'll I've assumed there's a lot of stuff. Yeah.

2:09:00 The studios used to do And that CAA was able to bring together into a package and then be like, Nope, studios, you are just financiers now. Totally. I wonder if this is part of what's informing this HP two dot oh strategy. Yeah, I mean the thing that I wrote down is that the biggest case is that the firm is actually unrecognizable in ten years.

2:09:20 that they're sort of the startup platform. Like an idea platform. And I I'm not being specific about what that means because I don't really know. But

2:09:29 maybe the right term is that they're like the startup dream machine, which actually lends itself more toward a studio. It would seem like I mean just based on all the work we've done at PSL starting twenty seven companies, like I do wonder if they'll shift earlier. And start being more of like a You literally are a person with an idea and we have an ability to sort of Take that.

2:09:49 And plug it in and The cool thing about the studio is we have that machinery built for like the first eighteen months. And I'd be curious, a lot of people talk about seed to IPO as an investor.

2:10:03 It'll be interesting to see if in recent horror, it's can sort of become the startup dream machine all the way from idea to IPO. Yeah, yeah, yeah. Well, or you could just go Raise a whole lot of money and you could be

2:10:17 The next, you know, disruptor in that uh in the industry. That's a great point. It's really like that Mark and Ben kind of have no sacred cows. And like whatever You know, they're very experimental, they're very willing to change things and like

2:10:32 It wouldn't surprise me that if some point in the near future they stop talking about it as a venture capital firm because they feel that it's a a sort of broader set of activities. Well, clearly they're already sort of going this direction with the media company and Yeah. All that. Yeah. Yeah. We also totally skipped over crypto, which I think is okay.

2:10:51 But can you give like one or two sentences on how they're different than other firms with a lens toward crypto. Well In one respect it was just simply that they were There first and early. And so they've been part of like

2:11:04 These big ones. Other firms have too, you know, USB being Primary among them and and then native crypto firms like Paradigm and multi coin and and all those great folks, but You know. To the extent that

2:11:15 Success breeds success is gonna apply in crypto. Early stage crypto investing as it Always has in Venture. Andreessen has been there, right? Like Coinbase. Dang. Solana.

2:11:29 Yep. Bit cloud. Like e everything interesting, they're there. So I think that's a big part of it. You know, the other piece of it is like It's different.

2:11:39 doing that. And they've built the machinery to do it. In a way that other traditional venture firms have not. I think If I understand the history right. I think part of the reason why They created a separate fund for crypto.

2:11:52 versus doing it out of the main fund was because of this. the same things that trigger needing w secondaries needing to be an RIA. I think if you do too much token investing in a core fund you would need to register and be you would lose your venture capital. Exemption.

2:12:07 So while other firms were registering as RIAs to do secondaries. Which of course Andreessen also does. They were like, Oh well we'll we'll we'll go do this First with the crypts and then now for the whole firm. To be able to buy tokens instead of equity. So I think it's just gonna take a lot of firms a long time to catch up to that.

2:12:25 And the operations of things of staying abreast of the things you can do in the US versus international, like takes overhead and they've invested in that overhead and they've figured out what the necessary infrastructure is from a regulatory perspective to do. Crypto investing. With LP dollars. Yeah.

2:12:43 So we talk about The bear case. Yeah. Okay, so here's my biggest one. We have been on an unprecedented, unbelievable

2:12:53 Bull run. In tech. that started the same year that Andreessen Horowitz was founded. They've never operated in a down market. I'm not saying that it's not gonna go well.

2:13:05 But like their strategy. has a line. Perfectly. With the

2:13:10 economic landscape while they've been operating in it. So it is untested. unlike all these other firms that have needed to uh if you believe the A sixteen Z haters who say they have no price discipline. Will that come back to haunt them during the you know, one or two funds from the vintage years of whatever downturn comes at some point in the future. it could hit them a lot harder.

2:13:33 Then it hits other folks. Yep. You don't have to debate that, I'm just saying that. Totally. Question mark.

2:13:40 That would be the knock. The other bear case I was thinking of is like they basically overextend themselves in trying to get too creative and imagining what this HP two point oh could look like and They have like a great very profitable business on their hands where they have really dominated an industry and like

2:13:58 them trying to turn that into something entirely new and different may actually not work. I gotta also say for a uh Firm and people that are So good on branding and Marketing and whatnot.

2:14:11 Calling this strategy HP two dot oh, you might want to rethink that one. It's like I don't know that HP is something you really want to associate with these days. Well, and nobody I mean, there's just not that many people alive and operating in the business world right now. or leading companies in an aspirational way who are aware of the HP that Mark talks about. Yep, exactly. They're only aware of the defunct PC manufacturer. You wanna say Amazon two dot oh? Great. Yeah. But

2:14:37 Anyway. I think a big one that I d I have no view one way or the other way this is whether this is Happening or not or at risk of happening. Would just be that as you turn this into a Big firm, it's already a big firm.

2:14:51 Politics are gonna start to creep in, right? Like it happens. This happens in organizations. And Frankly, probably politics have been the downfall of Every venture firm that has risen and fallen To varying relative degrees.

2:15:08 You know, there are all sorts of reasons, right? But you break it down at the end of the day. It's people, it's politics. That's the problem. And The bigger you get, the more opportunities there are the bigger you get and the more time that goes by. The more opportunities there are for

2:15:22 That's And so maybe some seams will start to get exposed and Other firms can now come along and Yeah, to die a hero or live long enough to be the villain. Like I guess they've been the villain their whole lives to a certain extent, but At some point they're gonna be the villained entrepreneurs. In some way they've been the underdog too. Like they've had this tailwind of feeling like

2:15:41 You know, fight the man. And you're right, like they're the man. So They're the man. Yeah. Yeah. I guess one other thing I was thinking about is

2:15:51 Speaking of Tiger Global and what's going on in hedge funds coming into late stage financing and now even early stage financing. Those folks are beating the drum of we're a financial investor and we're gonna give you the cheapest available capital. And you can use that capital to go and build your own relationships and hire people and do all the things you need to do that like VC is kind of a bundle. Of

2:16:15 Both. advice and relationships and capital and we're just selling you pure capital. There's some set of entrepreneurs who are gonna do that because they're very experienced. They have their own relationships, they don't need the services that a firm like A sixteen Z brings to bear. The question is will that belief spread.

2:16:33 where more and more people, even if they're inexperienced and could benefit from the the set of services that A sixteen Z offers. If they're like, actually the most capital at the cheapest price sounds great to me. And I actually just want all these companies competencies in house. Which, as hopefully we've painted along the way here, was a key component. of the Andrews and Horowitz strategy. Like there's all the stuff, there's all the services, everything about it.

2:16:58 But also they were offering the best herbs at the highest prices. Uh for a very long time. And if they're no longer doing that. Yeah. I think it's a very valid argument that

2:17:07 Price is what matters. It's sort of like Andrews and Horowitz had a different underwriting model on the future than the rest of the VCs did. And so far, because we've been in this bull run this whole time. It has proven to be right. So everyone else who is being too conservative in their sort of valuation models and basically underwriting of what future markets could look like.

2:17:29 was wrong. And That's why Andreessen Horowitz could both be the best product at the best price. But

2:17:37 Yeah. may prove to be the case at some point in the future that the gas in the tank runs out on software is eating the world. Or That we go through a little extended hiccup where people stop believing that for five years and the money coming after you dries up.

2:17:53 And LPs are difficult to raise from. Like I'm just imagining a little bit more capital crunched environment. Where like You can't be both. higher valuations with more money and a really expensive broad set of services. Yeah.

2:18:08 No, I mean in the long run, like obviously I think we all know what side we follow on here. Like everything, it depends on your time horizon. And if your time horizon is infinite, then yes, you and I being the optimists that we are, we're like looking at this bear case being like, Yeah, but as long as you can tough it out, you'll be fine. The internet. Never bet against the internet. Never bet against the internet. Mm. But you're so spot on about the underwriting thing that they were just underrating differently than everyone else, and more correctly, you know, the vignette from the New Yorker article with the competing V C the point of that competing V C was like This is crazy. The math doesn't work. Their underwriting is wrong. Yeah. And A sixteen Z is like, oh that thing that you said was crazy, where you're like the math doesn't work because the numbers are too big. We think we can hit those numbers. And they did.

2:18:51 Yep. And they did. And by we, like tech companies broadly that we invest in. Yeah. Well, I think that's the

2:18:59 This isn't exactly a narrative one way or the other. But maybe it's a narrative about the industry as a whole. We made this point on the first episode, but I wanna Double triple underline underscore here. We're telling this whole thing. And there's so much drama and it's so fun. It's like, you know, Andreessen's, you know, the underdog and the disruptor, and there's all this, you know, feuding and whatnot. This is all just great for everybody. It's just frickin' fantastic for Everybody. Like the fact that the New Yorker is writing about tech.

2:19:26 It's great for other VCs. It's great for startups. It's great for entrepreneurs. It's great for podcasts like you and me. It's great for Andreessen. It's great for benchmark. It's great for Scoya. Pull stop. Yep. Which is a great lead into power. So I think this is interesting,'cause I think

2:19:42 That They w had a source of power that worked really well for their first call it eight ish years, and now they have a different power. And remember for folks that Are new to the show.

2:19:55 Power is the thing that enables a business to achieve persistent differential returns. Like how can they be sustainably more profitable than their nearest competitor? The first one was clearly counter positioning. We've used it several times. in this show to describe the way that they

2:20:15 positioned themselves in the press versus Other folks versus incumbents. And I'm gonna use it a little bit more specifically in this case, which is they literally did things that other people could not do because their business models did not allow for it. If you were to go to

2:20:32 GPs at big firms and say In order to Bet on the future. correctly the way these other guys are and we need to staff up like this. overnight we all need to stop taking salaries for the next three years. Oh, and we all make over a million dollars a year in salary and have personal lives and burn rates that have accommodated that and

2:20:52 You know, that's even before we start getting our carry. the chances of that happening immediately. Rather than over the next five to eight years being you know, forced to was like zero.

2:21:03 And so there was that moment in time, much like how a CAA was able to do it in the agency world. Where They literally took a different business model and did a thing that the incumbents couldn't copy, which was genius. Yep.

2:21:17 It's totally genius. The other one was brand. Totally. And that's the one that will last for the future. Mm-hmm. All this highfalutin stuff is great and all the value added services are great and all the networks are great and

2:21:29 The executive briefing center is great. Let's not forget the business that we're in here. Which is Deploying capital. and getting a return on that capital. Now

2:21:39 That is a commodity. Capital is a commodity. And the way That commodity industries look is that they're pretty much undifferentiated.

2:21:49 'Cause the vast majority of the value is available from Uh near exact Provider substitute. And so what differentiates a commodity from another commodity?

2:22:02 Brand. Coke and Pepsi, baby. Uh there was actually a great quote, I forget where. Uh I almost put it in the script and I didn't of An entrepreneur.

2:22:11 talking about the Andries and Benchmark thing and they're just like, Oh, it's so great. It's like watching Coke and Pepsi, you know, do a price war. Truly. I'm just sitting here sipping. Truly. It's like watching A game of chess play out too because It is simultaneously true that

2:22:29 having a great board member It can be game changing for your company, having this set of services can be game changing for your company. Like I just watch not to toot our own horn, but like some of the folks that we're able to bring into portfolio companies through us at PSL recruiting them. trajectory changing for companies. And I'm sure like I've never worked at Indries Norwich. I'm sure that works in spades there. And so like even forget all the other services. Like if you have a great recruiting

2:22:57 Mechanism game changing for companies. And also it is true. That the primary that comes from raising capital is the capital. The brand piece is also interesting too, and you said about like

2:23:10 You know, and uh just riffing a little more on the Coke and Pepsi thing. Back to the benchmark versus Andreessen. Benchmark's brand. We are the craft venture capital firm. Yeah. Andreason's brand. We are the franchise. It's just like Coke and Pepsi, right? It's like, you know, Coke is, you know, whatever, you know, Coca Cola classic with the polar bears and whatnot, and Pepsi is like the taste of a new generation, you know?

2:23:32 It works. Like th there's just different segments that they address, like It works. Yeah. It's funny, while we're talking about power, we should also talk about like when you talk about profits, you know, like per persistent differential returns, you should literally talk about like pricing power. In Forbes it was reported that Andreessen Horowitz takes thirty percent carry.

2:23:51 And so It's interesting to see that like their returns and their market perception has literally turned into them being able to Price higher than their competitors.

2:24:03 this is LP facing, you know, when when it's them versus other venture firms and they can say, Yeah, yeah, yeah, you're gonna get a worse deal with us than you're gonna get with other people, but it's worth it. So you'll take it. And they do. This is the Hamilton Helmmer definition of brand power, right? Is like you can charge a higher price for the same product. Yeah. That's why people pay more for a Tiffany's diamond than uh

2:24:24 No name diamond. Yep. So the brand thing is multi-sided. It's your brand entrepreneurs and it's your brand LPs. Yeah. And the entrepreneur version of this is You get into the round.

2:24:35 You get into the round and you get a a large ownership allocation in the round. Yeah. Alright, playbook. I know we've done this already, but there's a few Few that I want to hit.

2:24:45 Go for it. Alright, so just to review all the things that were like Unheard of. or uncommon before A sixteen Z started doing them. GPs as former founders rather than investors.

2:24:57 Huge team of experts, which is now known as V C platform. Calling everyone at the firm a partner. Blogging. Which other than like Brad Feld and Fred Wilson. doing transparency versus opacity and content marketing more broadly, like that didn't really exist in Venture.

2:25:13 paying huge prices to blow your competitors out of the water and just offer much higher valuations and bigger checks. It's crazy. Yeah, literally nobody did that. Yeah, it existed to some extent in isolated ways, but like no one just said like F it, we're doing it over and over and over again'cause we're underwriting the future differently than you are. Yeah. And not not really. Like people would be like, Oh, I can't believe I mean'cause I entered the industry in twenty ten, so Andreessen was there, but it was still early days. It would be like Oh, I can't believe the price that X Firm paid for this, you know? We offered a six pre and they did an eight pre.

2:25:45 You know, like nobody was just step change. Nobody said, like what if you raised eight? Yeah. And then we'll figure out how to value that. Yeah. Uh, and then lastly, venture firms investing in crypto. I think USV probably gets a little bit of credit for I think they were earlier. In some ways.

2:26:00 But not nearly investing as many dollars and for sort of as long a period and building a brand with the crypto the way that Andreessen has gone on to. So you look at those, what is that, six things. I would I would add seven two of like uh PR. Yeah. Yeah, I'd I guess I'd put that into like the content marketing, brand building, but you're right, it's a different function of marketing. So those seven things that like you kinda take at face value like that's

2:26:27 Part of the job. That's what it is to be a venture capital firm. Which like just weren't things. a decade and a half ago before Andreessen Horowitz made that a part of what it takes to do this job. Yeah.

2:26:42 I can't argue with that. It's literally their playbook was to change the requirements. of the job to be done for everyone else in the industry. On that note. There's this interesting thing that I've been thinking about, which is like

2:26:57 Everyone the common knock was that they were overpaying to buy name brand for themselves to sort of like buy their way into winners. Which First of all, even if they did that, it actually is accretive to their LPs. since their LPs would benefit from being investors with in this name brand fun in the future, assuming that they were going to continue investing in subsequent funds. Like it actually was a good use of the capital Even if their prices were irrational because great.

2:27:23 Now In the first year when that fund was deployed. Uh yeah, we might have overpaid for some deals, but now we're in a top three franchise. So awesome. And the first fonts ended up being Good.

2:27:36 Right. Would anybody argue today that they actually paid too high of a valuation for anything they did from 2009 to 2015? Absolutely not. Yeah. One other corollary on this uh playbook theme I wanted to make. We made this point on the last episode, but I don't think we've talked about it yet here. This is just so silly. And I I didn't quite

2:27:57 Get this perspective until being outside of the institutional venture industry and now it's just obvious to me. It's so silly. Why would you ever argue

2:28:08 publicly argue as a venture firm that valuations are too high. Like who's your customer? Your customer is entrepreneurs. That'd be like saying like a politician running and being like Taxes are too low. We need higher taxes. That is my platform. And not only that, but this specific other competitor of mine, you know, from the other party who's running, the problem with their platform is they want lower taxes. If you're an entrepreneur listening to this, you're like, uh, I like lower taxes, I like higher valuations. Right. Yeah, that's a great point. Yeah, pick a different thing to argue about, if that's your your side.

2:28:44 Don't argue about it. Right. Hm. Yeah, speaking of like things that are specific to institutional VC Like we discuss on our V C fundamentals episodes in the the L P show,

2:28:57 There's an investment process that has to happen because there's a lot of partners. So you need to figure out like we raised this fund. Like we got these twenty two people. Isn't that crazy? It's twenty two now, but even imagine a smaller partnership on five, six, seven people like how do we make decisions? To invest this fund. Well, an interesting thing that they do is they do not have a consensus based

2:29:17 Approach. So I think, and this is according to the information which is LinkedIn sources. Any GP can pull the trigger on any deal on their own. So they can say like

2:29:28 I'm going to bat for this. The way Mark describes it in some podcasts is that they assemble a red team. to basically be there. The way we've talked about this at PSL and I've I think I've talked about it on LP episodes in the past is like to have a foil. If you're advocating to turn a project into a spin out, someone should kind of be the the bear case on it or your foil. Mark calls it a red team and he's like we basically

2:29:48 staff someone with the responsibility of going and trying to figure out why this is a bad investment. Because if you don't have the consensus of the partnership and you're putting your name on the line, sure, we can we should do that investment, maybe like it's a good non-consensus bet. But also you should have to go argue with someone who's going to present the other side of the case. And he's like, We figured this out because Ben is is my red team.

2:30:10 Like I I can come in and be super optimistic about something and Ben is naturally good at'cause you know, they fight like dogs. Like he's naturally good at presenting the other side of my arguments and we decided to institutionalize that in the firm, which I think is really an interesting approach that both forces you to be diligent, but also allows for non consensus bets. Interesting. Yeah, I like that in theory. I wonder in practice how much it actually goes.'Cause like you and I know, like, these deals happen in like

2:30:40 Days if not hours. Like you're not you know. Lightning speed. Interesting. It's a interesting At least in theory. And like great to talk about on podcasts. Yeah, great to talk about on podcast. It makes total sense, though, that they can't be a consensus driven firm with That many people, like you're never gonna agree on it. Anything. Yeah.

2:30:57 Especially at the pace that they're doing deals now, because of the pace that the whole thing is working now. Yeah. A last one that I had that I just thought was interesting that we didn't talk about on any of this, but Mark talks about a lot, which is He doesn't really believe in pivots.

2:31:12 Or the notion of like failing fast or the lean startup. I'm amenable to this argument. Even though I do a ton of testing of ideas. That like the big innovations throughout history.

2:31:27 are made by true believers. Who just kept trying. Like there's something like The filament. of a light bulb was like Edison's two hundredth attempt at creating filament.

2:31:37 And it's like it may not be the right decision for you as an individual. to keep bramming your head against a wall, but it's good for all of us as a society that there are a lot of people who are willing to keep running at something. Almost illogically so, in a way that is potentially not in their best interest because

2:31:56 that is where the true breakthroughs come from. And if everybody's always like looking at data from the first sort of test and they're like, eh, it's not really working. Let's try something else. then like you don't get the breakthrough innovations. Yeah. That makes sense. I mean I think like Both of these things are true. But certainly like we didn't like test acquired. And if we had tested acquired in the early years,

2:32:18 We probably would have been like, Well, that's not working very well. Totally. But Passion projects. Passion leads you to do things that aren't necessarily economic. And that at some point you sort of look around and you're like, Whoa, value creation has happened. I love that image.

2:32:36 Hopefully not said in that sterile of language, but Yeah. I like that. I'm I'm I'm gonna use that with uh with startups code for just feel like Guys.

2:32:47 Value creation has happened. Well, I was talking actually with uh Portfolio CEO the other day about how I really believe from doing Acquired now that And we talked with Patrick O'Shaughnessy about this, that like brands just take time. People don't love stuff quickly. They're always skeptical of new stuff.

2:33:05 And so brand is like It's time. times absolute number of people who are familiar with the brand times the magnitude of how much they care about the brand. Sure, you can get the coefficient on those second two factors to be very high, but it sure helps to have a lot of time because every you know, multiplies through. So just looking back at acquired and A16Z now has this going for it too. It is

2:33:28 remarkable even if the product doesn't get any better, and certainly the product for us and for what they offer has gotten dramatically better. That Time existing. in market, continuing to bang your head against the wall and keep doing your thing and being true to it. Even if it's an irrational decision because it may not pay off.

2:33:47 The passion. can allow you to stick it out long enough such that a brand can be built. Well, there's also like once you Get a brand.

2:33:56 Like that. I mean, I guess this is the point of seven powers, like any of the powers once you achieve them. You're just like a whole lot more robust than you used to be. Like think about the first Andrewson Fond. And the Skype deal. If they had lost money on that.

2:34:11 Man, history would have been different. Totally. That could have torpedoed everything. Yep. Now They write a couple hundred million dollar check into something and it blows up in their face. Like like let's take Clubhouse, like

2:34:22 Dury's still out on Clubhouse, like will it work? Well then, you know who knows, but let's assume for a minute that just play out a scenario where it goes to zero. And they lose a whole bunch of money on it. Won't matter at all. Literally no impact, right? That's such a good point. Or similarly like early days of acquired, right? Like first couple of episodes like if we had just like if something really bad had happened, we probably would have quit.

2:34:44 Not that I wanna do this at all, but like if we have a bad episode or something like that, like we're probably gonna be fine. Yeah. I don't know. Ah man, this is like my constant paranoia. 'Cause it's such a big risk to dedicate it does feel a little tight ropey. Listening to a podcast is a risk. because we're like totally off topic here, but this is something I'm like super fired up about. If an article's boring, it's fine,'cause you skim it real quick and then under a minute you're gone.

2:35:07 If an episode sucks. You're like wow, I just dedicated an hour, two hours, three hours of my life to this thing, I'm not gonna trust these people to produce things that are high quality anymore. I'm gone. And so I I don't know about you, but I constantly live in fear and like have gotten aggressive on If this thing is not

2:35:26 Of the quality bar in which we set Every single episode we release is a risk. It's funny, like I Think my level of

2:35:39 I I'm curious what you think. My level of nerves going into every episode has Remain. Constant and steadily increasing for the six years we've been doing this. Totally. There's more on the line every time. Every time. Yep. Huh.

2:35:53 Well, that was a digression. Totally. So great. There's so many stories. Continuing to riff on the tangent of The podcast.

2:36:03 We were worried we were gonna run out of stories after like ten episodes. Well, we did run out of good acquisitions. That's true. That's true. But my God, there's stories everywhere. And in our community now, like it's just it's the best. Firewheel. Alright, grading. Dun.

2:36:20 So Listeners Yeah, we are not LPs in in uh Andre's and Horowitz, and if we were, we wouldn't be able to disclose their returns. That said. Thanks to our great relationship with the folks at Pitchbook Data.

2:36:33 We are able to pull a ton of stats on when they invested, at what rounds, at what valuations, were able to scan S1s of all these companies to see if they owned more than five percent at IPO what they own. We do know how much money they've raised. And so We're able to do Some napkin math. And here's the napkin math that we've done.

2:36:53 So we looked at the proceeds from their top ten liquid outcomes. And that may not mean that they've actually liquidated their position, but that they could have. So that is And I'll I'll just run through'em real quick'cause I think we said some of the numbers earlier, but um it's it's worth highlighting again.

2:37:10 Octa was a billion and a half to two billion back to Andreessen Horowitz. Coinbase eleven billion, the granddaddy of them all. Airbnb we estimated around three and a half billion. based on an eighty five billion dollar market cap, they have IPO'd in the last six months, so it's reasonable to think that they would start liquidating that position now. We think that they own about four percent. They're a sub five percent shareholder, but are of course on the board. They led the series B. And I think they put sixty plus million into the series B, so

2:37:41 Yeah, a lot of lot of capital there. So probably three, four percent somewhere in there. lift they generated about a billion dollars Pager Duty half a billion. Slack we think about three billion, assuming they held all the way to the Salesforce deal.

2:37:55 eighteen months later. Pinterest a billion and a half. They own ten percent at IPO. Which was I think like a fifteen billion dollar market cap, but has three X since then, so it depends how much they held. Depends when they distribute it, yeah. Right, could have been higher.

2:38:10 Roblox a quick one point two billion. GitHub a billion and a firm somewhere between half a billion and a billion. Again, all these things are estimated, but if you just look at those companies. And think about distributing pretty early, like a assuming that they didn't hold Octa all the way until it is worth thirty three billion dollars than it is today.

2:38:29 These companies probably generated about twenty five billion in returns. So An interesting thing to do is to then look at That

2:38:39 divided by the AUM of the funds that they come from. Just to say what's like the worst case scenario for their multiple. So that's assuming no more value from anything else. Which is simply uh not true. And and we'll revisit some of the things that still could bear fruit. after we just do the some quick math. So the you look at their total asset center management, eighteen point eight billion. But like

2:39:01 A lot of that doesn't contribute to any of those companies we've talked about. So subtract out the early stage fronts from twenty nineteen onward. 'Cause none of those companies were from, you know, those haven't matured yet. So that's two point two billion off the nineteen. Then You gotta take out their most recent late stage fund from six months ago, which is three point two billion. Then you take out

2:39:22 at least crypts two and three, and maybe you even take out crypto fund one, which is only another three hundred and fifty million, but then you're pulling out from all of that another two point seven to three billion. Then you take out all the biotech funds, which is one point four billion, you have like Close to ten billion dollars to subtract out. And you could maybe even argue that one or two of the more recent

2:39:45 Early stage funds. To take out as well. But to make this like again all napkin math really easy,'cause we're just trying to figure out like Did it work? Is it going to work? Is it showing signs of working? Let's just say their first

2:39:58 Eight billion dollars. We have some data on the And then the more recent eight billion dollars jury still out. We don't know yet. Time will tell. And so if you look at that sort of first eight. Well

2:40:10 That created at least twenty five billion. Which is a cool three X. And You're not even counting And this could be a monster data bricks.

2:40:20 Which That could be's worth twenty eight billion, and it wouldn't surprise me if A sixteen Z owned like twenty five percent. They invested very early and they've been investing every round. They could own like seven billion of that company at the current valuation. Again, I don't know, but this would be a reasonable estimate. Instacart. it would seem reasonable to think they own like two billion in that.

2:40:40 Robin Hood. small percentage'cause it was only a seed investor and then something more recent in the growth round, but like you also have like Robinhood, Oculus, Flatiron Health, Stack Overflow. Instagram, which is so funny. They they generated seventy eight million out of Instagram, which was a nice return at the time, but sort of doesn't matter in this overall analysis. Today. So that twenty five billion number

2:41:03 that gross three X is even before All these other companies that definitely contributed And before all the other ones that, you know, may have returned capital, may have done well, but not Coinbase well. Well, and there's one more Dark Horse two. Which is I believe in the crypto funds and maybe some of in the early core funds.

2:41:24 They're buying Bitcoin and And either. Oh interesting. I'm Almost a hundred percent sure.

2:41:31 At least Bitcoin, if not Bitcoin and Ether, they were buying in a bunch of these funds. Well, depending on when they were buying that's game changing for this whole depending how much capital they put to work for this whole analysis. Yeah. The reason that I wanted to sort of do this napkin math is to basically say, Okay, we know with the first half of the capital that they raised in their life.

2:41:51 At the very worst case. They had as good a returns as anyone else in the top quartile of the industry. So at the very worst case It didn't not work.

2:42:02 Right. Yeah. There's no uh this is not enough. Yeah, they were able to do a hard thing, which is burst onto the scene. And break into something where there is really persistent returns year over year, decade over decade. And compete with the very best of the best.

2:42:19 And do we actually have the data to tell you if they're, you know, the best in the industry or to compare them to Sequoia? It's too hard to do. But it also doesn't really matter, right? Like it would be fascinating to know if they're better than Sequoia or better than Benchmark or not. But like they're in the ballgame, you know. Yeah. And this also I think we can finally put to bed that leaked data in twenty sixteen. It's not that the data was wrong at all, but like the conclusion of all a lot of people's analysis is

2:42:45 You know for the brand that they have, Andreas and Horowitz is way underperforming Gosh, they're only at a two X or a two point something and you're like Okay. We don't know yet.

2:42:55 Coinbase, if you had analyzed Coinbase in twenty sixteen, Would you have been able to determine that It's going to whatever gigantic multiple it was on that fund just from that one company, no there's no way you would have been able to. The apples take longer than lemons to ripen. That was I uh I skipped over that in the script for a time, but it was a Wall Street Journal article that was so clearly a hit piece planted by rival venture firms where they had a bunch of quotes from like L Ps and stuff that like they're

2:43:25 You know, the entries and returns were I think the headline of the article was something like Despite Pluster or whatever entries and returns are average. Yeah.

2:43:35 Well, I don't have much more to add and it frankly, I guess I would throw an A on it. with the plus sort of being if we ever got cleaner data. But

2:43:45 For what A challenge it was Two Break in and challenge the incumbents in such a short time frame, it's remarkable how well they've done.

2:43:56 That's spot on. It's an A. Only reason it's not an A plus is like A plus is Facebook buying Instagram and getting five hundred billion dollars of value for one. We just don't know enough yet that Maybe it could end up being that in the future, but it's not that today.

2:44:11 But No way, this is less than an A. Who else did this? Nobody's done this. And just to put some numbers, like I'm gonna guess that the first eight billion of capital in these funds that we're sort of calling inbounds for this analysis. Returned.

2:44:25 Somewhere between twenty five and probably forty ish billion. It's so good. You know, and it's funny, like The other navelgazing aspect to venture and investment returns that people talk about all the time is like uh the multiple and like the IRRs and efficiency of capital and like

2:44:47 Only having the best companies and blah blah blah blah blah. Just the magnitude is like at the end of the day, what really matters is the magnitude here. Yeah, the absolute dollars. The absolute dollars. Like they generated what let's make it easy, let's say thirty billion that they've returned on eight billion invested. That's twenty two billion dollars. That they've generated. Name me other firms who have done that. There are a few, but there are a very, very few who have done that.

2:45:13 Yeah, it's interesting. Like a good multiple means you are right. But A great amount of absolute cash. returned. Means

2:45:21 you were three things. You were right with conviction. You had access you had winning access to be a meaningful

2:45:31 And you effectively did the work to obtain the capital in the first place to be able to deploy a large enough amount of it to generate a large dollar return. You gotta be good at a lot of things and you gotta be convicted and right in them. Yep.

2:45:45 And I think large institutional LPs, I think that's how they think about it, right? It's like They're like, Yeah, great, yeah, ten X fund, fine. If it's a fifty million dollar fund and you ten X and you return five hundred million, like Clap, I'm proud for you, you know, but like I'm not jumping out of my seat. But you you know, you return me twenty two billion, like now I'm jumping out of my seat. I don't care what the multiple is. All right.

2:46:10 Well, um Gosh, it feels good to Come to the end of this two part or you want to do carve outs? Yeah. Let's do some carve outs. I got two.

2:46:19 First they're both sort of uh quasi carve outs. The first one is a quasi carve out because I've already had this author as a recent previous Carvell. Arthur C Clark.

2:46:30 So good. Was it on the Ethereum episode maybe I had him Has my curve out. Oh gee, super. O G

2:46:39 Science fiction author. I have since continued to read his stuff and I read Childhood's End. Have you read Childhood's End? No. Oh my gosh. This is so good. You gotta go read this book. You know the movie Independence Day?

2:46:51 Yeah. The Will Smith movie. Absolutely. Oh. So great. So Independence Day is based on childhood's end, but it's only based on the very beginning. Like the beginning of childhood's end is

2:47:02 what Independence Day was based on. But then the rest of the book takes a very, very different Turn. And it's super mind bending and really cool. Can't recommend it enough. That's number one.

2:47:15 Number two is specifically for you, Ben. I have a carve out. For You. We are both huge. MKB H D

2:47:24 Marcus Brownley fans. Yeah. And I think Miss M just launched. New channel. on YouTube called the Studio Channel.

2:47:32 with the video, you are gonna love this because you are such a gear geek. Studio tour. MKB H D studio toy and like Oh my God, it's so cool. And he's got great gear. I gotta go check that out. I was watching and I was both like jaw on the floor and I was like wow, we are such amateurs at acquired like he has a litany of red cameras.

2:47:52 Lit me. And like Wow, video is I have so much more respect for what YouTubers do. Like audio is easy. We're playing on easy mode here. Oh, it's so much harder.

2:48:02 For sure. Okay, cool. Like I'm legitimately adding that to my to do list right now to go watch that after. Alright, mine is continuing my recommendation of the sopranos and good fellas.

2:48:16 The Godfather. Somehow I have never seen the Godfather trilogy. Like it just escaped me. I know. I'm like going back and like actually watching all these things. Correct The Godfather. Correct. You know, what whatever path leads you to greatness, the point is you get to greatness. Yes. And greatness it is. God, it is so good.

2:48:39 And like One is so like good and raw and two is so artistic and well thought through and the method of storytelling flashing back and forth between the two stories, I think Some people complain about it. I loved it. I think it's De Niro's best performance ever.

2:48:56 It's definitely Al Pacino's best performance ever. Yeah. And three three exists. Three I turned off. Actually, I didn't watch three, I watched Coda. People think it's better than three. It's like a reshot. Uh there's some stuff that's reshot and re edited.

2:49:12 And like maybe if I had fourteen years between two and three, then it'd be okay. But because I tried to watch them back to back, I was like allergic. to the nineties isms of coda that where I was just like, This is unwatchable. I mean the the haircuts alone. I think Michael Corleone says more words in the first ten minutes of that movie.

2:49:33 than in the entirety of two. I believe it. I believe just no subtlety. So that's an anti car. Three. I've I was just I this is what I hear from everybody One and Two are so good. Oh, they're so good. There's the horse head.

2:49:48 Mm. It's beautiful. Just great. All right listeners. Now is a great time to talk about one of our favorite companies, Statseg.

2:49:57 Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly.

2:50:19 The real advantage is how quickly you learn what changes actually created value for customers. And how fast you can use that signal to guide what you ship next. This is where StatSIG comes in. It brings experimentation, feature flags and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, well with that, listeners. Come join us in the Slack.

2:50:56 Become an LP. All those links are in the show notes. If you liked this episode. Share it with a friend. You could share it on social media. That'd be nice, but I actually like the one to one stuff better. We're all about the slow methodical high touch growth here at acquired.

2:51:11 And so if you can uh put your personal someone that you think would really appreciate it, then that's who you should share it with. We love social media shares, of course, but it's kinda hard to like Just post on social media and be like, You should listen to this three and a half hour podcast that is part two of Andre Son Horo. It's like You kinda gotta like really convince someone, so

2:51:31 If you love this. Tell your friends. It's like when I get an event bright invitation to go to something versus when a friend texts me and like, hey, you should come over for this. You know? Yeah.

2:51:40 Exactly. It's totally different thing. All right, listeners. We'll see you next time. We'll see you next time. And

2:51:48 Wait, we got one more piece of news. Who got the truth? Live on Spotify. Go check it out. You can listen to it here.

2:51:56 For the next two minutes. And then Go listen on Spotify. Young Spielberg. Mike Taylor.

2:52:03 Take us out. Who got the truth? Is it you, is it you, is it you Who got the truth?

2:52:21 Is it you, is it you, is it you Down! Another story!

2:52:44 Right. The smoke I need to know Who got Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you?

2:53:12 Set me down Drain! Another story Not Yeah for

2:53:23 Flip flop like a seesaw to lose now See you

2:53:55 Who got the truth?

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