In a series of two podcasts, a16z founders Ben Horowitz and Marc Andreessen discuss the technology industry, startup ecosystem, disruption theory, and much more.
All errors, omissions, and misrepresentations are mine.
The computer itself is ~75 years old. Cracking codes in WWII → adopted by governments/businesses in 60s/70s → personal computers in 90s → smartphone in 2007 → everyone will have a smartphone connected to the Internet by end of decade (year of the $35 smartphone)
What happens in media, TV, retail, education, healthcare when everyone has ability to consume content online?
It's prime time to think about how we can reinvent things in every field, now that software is eating the world and playing a role in everything. It has already happened in retail/ecommerce + financial services; the big ones in next 10 years will be healthcare, education, government.
Why now? Because it can be done now, because everyone will be online. We need to give every kid on the planet access to an Ivy League education. We need to give every person on the planet access to modern healthcare. The only way to do that is using technology.
Healthcare and education should be something everyone on the planet has access to. This is impossible with old ways of doing things; so far changes seem to suffer Baumol's cost disease — technology doesn't seem to be driving down costs in those fields the same way it has in ecommerce/financial services.
Software is eating the world — what if you're on the other side and are being eaten? How do we bring those folks along?
The misunderstanding is that those jobs get eaten and there are fewer jobs — that's not what will happen; the jobs 50 years from now will not be the same as jobs today. The challenge isn't the absolute number of jobs, rather the transition from one set of jobs to another. We need to apply technology to bring down the cost of things, so you can make policy decisions as a social safety net to prevent people from losing their dignity when they lose their job, and also be in position to be productive again as soon as possible.
How does now look different from the late 90s/early 2000s?
There's a running thing in the valley that it's another bubble — but it's year 10 of them calling it a bubble; maybe some point they'll be right. The thing that has changed so much is that the technology world is so much further along. When we built Netscape, we had 90% market share and 50 million users. Today, more than 2B people are online and it's rising very fast — 40-50x market expansion in ten years. How many businesses have 1B of anything? Catholic church, Coca Cola, Google and Facebook, soon Whatsapp, iPhone, Android?
Drones, Bitcoin, 3D virtual reality — how do you keep up, and how should the rest of us keep up?
One of the tenets when we started the firm was that we'd only invest in things we understood, e.g. software as the core IP. All of these things are different manifestations of software becoming a more powerful force in the world.
Where do you see most starkly how software is moving into the physical world?
Key assumption is every physical thing (even pills in the future) will become smart in the next 10-20 years: all have chips in them, connected to the Internet, have data, be responsive to human beings. Of course, it'll take a while to get there. The smartphone was around for 10 years before the iPhone; the Internet was around for 30 years before we made the web browser. It's a long term thing, but will happen through the process/experimentation we are seeing right now.
a16z started amid the worst crisis in venture capital in 40 years. Looking back it was a good idea, but the VC industry has been shrinking — what do you think?
One of the things that bothered us about VC before was that the industry was in the dark — nothing was transparent about the firms, how they worked, etc., and that's where the nasty business happened. It's better now for both the industry and for entrepreneurs. a16z + other great firms put a lot of light on everything, and combined with what was going on with social networking/the Internet it made entrepreneurs really aware of what they should expect + want from a VC firm. Most VC firms didn't stand that test. At the same time a new tier emerged: angel investing — a new level of functionality for people just needing a little capital and a little help (as opposed to VC which was a lot of money and a lot of help); everything in the middle became no longer interesting.
Why is money still necessary when you just need a credit card and an AWS account?
Cheaper to start, more expensive to grow. Market sizes are much larger, the prize is bigger, so it takes more money to be able to build a market. You can start with 3 kids eating ramen noodles, 3 laptops, 3 lattes a day, but at some point you need to build a company that goes and takes the market. You'll need a sales force, marketing, partnerships, expansion capital. These companies almost never stay small; it's very rare not to raise money from venture capital + grow.
VC has done poorly as a global enterprise. Will that change at all?
Some really large companies are coming out of China right now -- Alibaba is a monster. People sort of expected that if they focused on building software companies like Silicon Valley, they'll end up like Silicon Valley, which was a mistake — policy + tax breaks + good university doesn't make SV; it's the network effect, and competing without SV's level of engineering/executive talent is a huge disadvantage. There should be 50 Silicon Valleys, not one; but they should be other areas of tech, of innovation — regulatory-free zones make things difficult to build here easier to build elsewhere.
Is there evidence of other Silicon Valleys already?
On the zone side, there's a long history of Special Economic Zones e.g. Hong Kong, China, now Japan, South Korea (stem cell-based health projects). On the other side, there's an explosion of entrepreneurial activity all over the world — most vivid example is Chris Schroeder's book Startup Rising, talking about high tech innovation in the Middle East, even in countries where you're most concerned from a geopolitical standpoint.
Do you plan on tackling that as a VC firm?
One of the things as a VC firm is that you don't have to be in every deal (as opposed to a startup where you do want every customer) — you want things you're best suited to do, where you'd be the best firm possible. For us, it's primarily software-based things in Silicon Valley — we understand the culture and the technology here.
The world is getting flatter but it's definitely not flat in terms of culture, motivation, stock options. We can have a very good business investing in SV; whether we expand or where we expand that is TBD but not critical for survival. But we have companies like Facebook/Twitter/Teleport that bear directly on this, acting as platforms for global communication.
Disruption theory (+ Clayton Christensen's thinking) has been around since 1997. Do you build companies differently today?
His book is brilliant, and it's funny he's seeing criticism now after being proven right — the mechanics that make competition difficult for incumbents are still in effect. It explained at the time a phenomenon that is now obvious but back then was tricky: why there needs to be new companies. We use his theory to tell us both what to invest in and what not to invest in — it's dangerous to invest in companies that are attacking "new incumbents", e.g. Google being run by Larry Page, who is fully aware of the theory of disruption and is in full command of his company.
The term "disruption" has negative connotations, but the actual way Christensen used the term was applied very positively in a very specific circumstance: progress happens because new companies do new things, and disruption is the process by which the new things are able to take over from the old things so that things — products/businesses/opportunities — can become much better.
It's very difficult to transition from one thing to another. How are Google and Facebook doing it?
People often think "big companies can't innovate, small companies can", but it's more like "new companies can innovate; old companies (usually without their original inventors) can't". When Watson, Packard were still running their companies, they did a phenomenal job. Zuckerberg & Page are still running their companies, and as innovators they are still very effective at doing new things.
If you're an old company run by professional managers, you're really good at optimizing and studying the business you're in, e.g. choosing to stay with and reinforce web when mobile came along. But if there's a new business that comes that's inconsistent with that, you get stuck. But if you're Mark Zuckerberg who created a business from nothing, you have a different view of the world — it's not the business Facebook is in, it's how you get another business like Facebook. Meg Whitman's has the same view at HP with Project Moonshot (attacking blade servers).
What's something you wish people had told you as entrepreneurs?
Macroeconomics can have a huge impact on markets, and private funding can change very rapidly — tech stocks went down 95% in previous bubble.
What do you want more or less from entrepreneurs?
It'd be nice if it wasn't so important to entrepreneurs what their peers' valuations were — it's probably the most meaningless thing imaginable. Peter Thiel talks about this — competition is actually really destructive — and this is the worst kind of competition since the only benefit you can get is you can tell your friend what valuation you got. Bad errors and decisions/judgments can easily result from this.
The best entrepreneurs we work with are very courageous, work their way out of whatever problem they're in, keep pounding and pounding and pounding. There's a little too much in the Valley of pivots/lean startup/minimum viable products/failure is good and all these excuses to be able to give up when things aren't going well — but the great entrepreneurs in history have been opposite personalities to that: I don't care what kind of problems we have; I'm not going to give up.
The Hard Thing About Hard Things — anything you wish you were pushed harder on?
Building these companies tend to be very dynamic and very situational, and a very frustrating thing about management advice in general (both in books and from board members/pattern matchers) is that they're giving you advice based on something that may or may not be relevant to you. Without knowing why someone is telling you something, it's pretty difficult to get value out of it.