MARC ANDREESSEN IS AN entrepreneur, investor, engineer, and technology activist. He was a co-creator of Mosaic, the first widely used web browser. Andreessen was also a cofounder of Netscape and Loudcloud and is a cofounder and general partner of the venture capital firm Andreessen Horowitz. A New Yorker profile described him as “seething with beliefs. He’s an evangelist for the church of technology, afire to reorder life as we know it. He believes that Silicon Valley is mission control for mankind, which is therefore on a steep trajectory toward perfection. And when he so argues, fire-hosing you with syllogisms and data points and pre-refuting every potential rebuttal, he’s very persuasive.” In terms of technology, he is in my view a candidate for “most interesting person in the world.” Marc serves on the board of the following Andreessen Horowitz portfolio companies: Anki, Bracket Computing, Dialpad, Honor, Lytro, Mori, OpenGov, and Samsara. He also serves on the boards of Facebook and Hewlett-Packard Enterprise. Andreessen graduated with a BS in computer science from the University of Illinois at Urbana–Champaign in December 1993.
1. “The key characteristic of venture capital is that returns are a power-law distribution. The basic math component is that there are thousands of startups a year that are founded in the technology industry that would like to raise venture capital, and we can invest in about thirty.”
We see thousands of inbound referred opportunities per year. We narrow that down to a couple hundred that are taken particularly seriously.
Venture capitalists spend a lot of time looking at opportunities and a lot of time saying no. Patience is a key attribute of the most successful firms, as it is of most every investor. Success means being very patient but aggressive when it’s time.
2. “You want to have as much ‘prepared mind’ as you possibly can. And learn as much as you can about as many things, as much as you can. You want to enter as close as you can to a Zen-like blank slate of perfect humility at the beginning of the meeting saying ‘teach me.’ … We try really hard to be educated by the best entrepreneurs.”
This quote from Andreessen reminds me of a famous quote from the Sōtō Zen monk and teacher Shunryū Suzuki: “If your mind is empty, it is always ready for anything; it is open to everything. In the beginner’s mind there are many possibilities, but in the expert’s mind there are few.” If a venture capitalist attends a meeting with a startup thinking he or she know everything, he or she will learn nothing. The right objective is to be a “learn-it-all” rather than a “know-it-all.” Similarly, if a venture capitalist believes that he or she can predict everything, he or she will fail. The right combination is optimistic and aggressive when the time is right and yet humble about what you do not know.
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Consensus |
Nonconsensus |
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Index fund/exchange-traded fund |
Above-market return for top VCs and value investors |
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Poseur VC |
Necessary part of success for top VCs |
3. “You want to tilt into the radical ideas … but by their nature, you can’t predict what they will be.”
The entire art of venture capital in our view is the big breakthrough ideas. The nature of the big idea is that they are not that predictable.
Most of the big breakthrough technologies/companies seem crazy at first: PCs, the Internet, Bitcoin, Airbnb, Uber, 140 characters. It has to be a radical product. It has to be something where, when people look at it … at first they say, “I don’t get it. I don’t understand it. I think it’s too weird; I think it’s too unusual.”
There will be certain points of time when everything collides together and reaches critical mass around a new concept or a new thing that ends up being hugely relevant to a high percentage of people or businesses. But it’s really hard to predict those. I don’t believe anyone can.
Howard Marks is famous for saying you can’t predict but you can prepare. He describes the right attitude as follows:
“Hey,” you might say, “that’s contradictory. The best way to prepare for cycles is to predict them, and you just said it can’t be done.” That’s true, but in my opinion by no means debilitating. All of investing consists of dealing with the future, as I’ve written before, and the future is something we can’t know much about. But the limits on our foreknowledge needn’t doom us to failure as long as we acknowledge them and act accordingly.
The best way to deal with what Marks is talking about is to purchase a portfolio composed of mispriced convexity, rather than trying to predict the unpredictable. Warren Buffett described a portfolio of bets with a convexity approach in his 1993 chairman’s letter:
You may consciously purchase a risky investment—one that indeed has a significant possibility of causing loss or injury—if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities.”
4. “Venture capitalists spend a lot of time talking about markets and technology and we have lots of opinions, but the decision should be around people. About 90 percent of the decision is people.”
We are looking for a magic combination of courage and genius. Courage (not giving up in the face of adversity) is the one people can learn.
When you have a team of strong people, their ability to adapt and innovate gives the company and the investor valuable optionality. The ideal flywheel a founder wants to create is a phenomenon where courage becomes self-reinforcing. Courage in the right circumstances begets more courage. Once a seed is created, the feedback loop can be powerful.
5. “An awful lot of successful technology companies ended up being in a slightly different market than they started out in. Microsoft started with programming tools but came out with an operating system. Oracle started doing contracts for the CIA. AOL started out as an online video gaming network.”
Because the future is not predictable with certainty, companies with convexity in the form of strong teams and research-and-development capability can often pivot into other markets. Pivoting like this can present problems if you are a venture capitalist who has decided to invest in only one company per category. But a pivot is often preferable to a shutdown and certainly preferable to staying a course that is doomed to fail.
6. “The great saving grace of venture capital is that our money is locked up. The big advantage that we have as a venture capital firm over a hedge fund or a mutual fund is we have a lock-up on our money.”
We invest in these companies with a ten-year outlook. Enterprise can go in and out of fashion four different times, and we can go and invest in one of these companies, and it is okay because we can stay the course.
Another investor who has figured out the value of locked-up capital from investors is Warren Buffett, who famously closed his partnership and started Berkshire Hathaway in the form of a corporation. Like a venture capital firm, Berkshire’s capital is locked up, which protects the firm from people trying to redeem during a panic caused by a significant market dip. The famous investor Bruce Berkowitz said once, “That is the secret sauce: permanent capital. That is essential. I think that’s the reason Buffett gave up his partnership. You need it because when push comes to shove, people run.” The ability of a venture capital firm to have cash in the bank (or at least the capacity to call on cash contractually promised by limited partners) allows it to invest through downturns, which are often excellent times to start a company and make investments.
7. “The thing all the venture firms have in common is they did not invest in most of the great successful technology companies.”
The mistakes that we make in a field like venture capital aren’t investing in something that turns out not to work. It’s the big hit that you missed. And so every venture capitalist who had the opportunity to invest in Google and didn’t just feels like an idiot. Every venture capitalist who had the opportunity to invest in Facebook and didn’t feels like an idiot. The challenge in the field is all of the great VCs over the last fifty years, the thing that they all have in common, is they all failed to invest in most of the big winners. And so this again is part of the humility in the profession.
Buffett and Charlie Munger call this type of mistake an “error of omission” (i.e., what you don’t do can hurt you more than what you do). Every investor makes errors of omission whether he or she is aware of it or not. Munger points out, “The most extreme mistakes in Berkshire’s history have been mistakes of omission. We saw it but didn’t act on it. They’re huge mistakes—we’ve lost billions. And we keep doing it. We’re getting better at it. We never get over it.” You cannot be in the venture capital business for long without passing on or not pursuing a startup that will eventually become a great financial success.
8. “With tech—and you see this with a lot of these new entrepreneurs—they’re twenty-five, thirty, or thirty-five years old, and they’re working to the limit of their physical capability. And from the outside, these companies look like they’re huge successes. On the inside, when you’re running one of these things, it always feels like you’re on the verge of failure; it always feels like it’s so close to slipping away. And people are quitting, and competitors are attacking, and the press is writing all these nasty articles about you, and you’re kind of on the ragged edge all the time.”
Starting a business is not easy or for the faint of heart. Working for a startup is something that some people might want to put on a personal bucket list, but wanting is not doing. Lots of people talk a good game about wanting to leave a big company for a startup, but when the time comes, most don’t do it.
9. “There’s a new generation of entrepreneurs in the Valley who have arrived since 2000, after the dotcom bust. They’re completely fearless.”
Founders today are very technical, very product centric, they are building great technology, and they just don’t have a clue about sales and marketing. It’s almost like they have an aversion to learning about it.
Many entrepreneurs who build great products simply don’t have a good distribution strategy. Even worse is when they insist that they don’t need one, or call no distribution strategy a “viral marketing strategy.” a16z is a sucker for people who have sales and marketing figured out.
Entrepreneurs who appear to have no fear are common today. It is good to be optimistic, but an absence of fear may lead to problems caused by hubris and blind spots. To illustrate one such problem, a major issue with the dot-com bubble of the late 1990s was that too many companies were being driven by sales and marketing people who forgot or failed to appreciate that the business needed to deliver core product value (i.e., products that solve real customer problems) in very large markets. Too much capital delivered to too many businesses driven by the fear of missing out caused people to make very significant mistakes. However, just because sales and marketing can be taken too far too early does not mean that sales, marketing, and distribution are not essential to the success of a business. For example, the serial entrepreneur and investor Rich Barton believes,
Search engine optimization (SEO) and natural search results are in decline. And, as alternative search paradigms (mobile, Alexa, App Store) grow, and as Facebook/YouTube/Snapchat radically increase the volume and diversity of “avails,” I would argue that we are entering a new golden age of marketing and branding. The future is a diverse and modern marketing team, made up of the clever analytical marketer who uses big data to make smarter decisions, the public relations expert who finds ways to help the brand tell great stories, the social media guru who knows how to stay on top of the latest channels and engage directly with consumers, and, yes, the artist/storyteller who can move people to tears. Marketing is back.
10. “You spend most of your time dealing with your companies who are struggling and trying to help them. It’s the companies that are struggling or failing that need the most help. The enterprises that are succeeding are doing just fine without you. The companies that are failing are the ones that need help and support. And so a lot of what you end up doing at the job is helping struggling entrepreneurs. It’s kind of continuously humbling. You are a troubleshooter. There’s always something going wrong. Psychologically—we talk about this with our partners—you have to be psychologically prepared for the opposite. It seems like it’s going to be a life of glamor and excitement. It’s more of a life of struggle and misery. And if you are okay with that—because it’s part of the package—then the overall deal is pretty good.”
Venture capital is a service business. Venture capital is not sitting in expensive chairs picking winners and speaking at conferences, but rather working day in and day out in the trenches helping entrepreneurs succeed. An effective venture capitalist spends time on things like trying to recruit engineers and other talented people for portfolio companies, closing early big sales, and finding new sources of distribution. Andreessen is saying that while both an entrepreneur and a venture capitalist should expect the journey to sometimes be a struggle, the process is worthwhile. Almost everything important in life involves tradeoffs, and venture capital is no exception.
11. “Software is eating the world.”
“Everybody’s going to have a computer. Everybody’s going to be on the Internet. And that’s a new world. That’s a world that we’ve never lived in before. We have no idea what that world is going to look like. It’s brand new. One of the things that you know is that all of a sudden if you can conceive of a way to make a product or a service, and if you can conceive of a way to deliver it, through software, you can now actually do that.
When you apply software you can do it in a very cost-effective way…. We now for the first time can go field by field, category by category, industry by industry, product by product, and we can say, ‘what would they be like if they were all software?’ ”
Andreessen’s “software is eating the world” thesis has always reminded me of what Bill Gates once said about why he decided not to build a PC in the early days of Microsoft:
When you have the microprocessor doubling in power every two years, in a sense you can think of computer power as almost free. So you ask, why be in the business of making something that’s almost free? What is the scarce resource? What is it that limits being able to get value out of that infinite computing power? Software.
What is new today, and what Andreessen is talking about when he says software is eating the world, is that the hardware is already in place and is waiting for the software at global scale. There is no longer a requirement for software businesses to also manufacture the hardware systems needed to implement the system. Smartphones are increasingly ubiquitous. Computers and storage can be bought on demand. The power of software to enable change drives Andreessen’s infectious optimism:
This is sort of where I disagree so much with people who are worried about innovation slowing down, which is that I think the opposite is happening. I think innovation is accelerating. Because the minute you can take something that was not software and make it software, you can change it much faster in the future. It’s much easier to change software than it is to change something with a big, physical, real-world footprint.
12. “It’s honestly hard to not be an optimist in this job, because we get 2,000 founders a year who come in here, sit in that chair right there, and they just tell us everything. They unspool the future to us, and they’re optimistic or they wouldn’t be here. Then all the new ideas. I wonder whether people outside a firm like this would be more optimistic if they could see and hear all of that stuff.”
There are two very different parts of the economy. There’s the part where there’s rapid technological change and very rapid productivity improvement. You’ve got this other, second part of the economy that’s the exact opposite — where quality is not improving and prices are rising.
The economy has bifurcated. In high-productivity sectors, prices are crashing. The sectors where prices are crashing are shrinking as a percentage of the economy. TVs are going to cost ten dollars and health care is going to cost a million dollars.
The rising cost of a modern college education is just staggering. In the industries where there’s rapid productivity growth, everybody is freaked out, because what are people going to do after everything gets automated? In the other part of the economy, that second part, health care and education, people are freaked out about, “Oh my God, it’s going to eat the entire budget! It’s going to eat my personal budget. Health care and education is going to be every dollar I make as income, and it’s going to eat the national budget and drive the United States bankrupt!” And everybody in the economy is going to become either a nurse or teacher. It’s really funny, both sides of the economy get polar opposite emotional reactions.
Today’s technology advances often produce efficiency improvements which in turn produce lower costs, which translates into lower spending and measured GDP. More is being done with less and yet traditional measurements say that productivity is decreasing since less money is being spent in more productive sectors. In addition, many people assume that innovation always creates more producer surplus and profit. Charlie Munger describes the reality:
The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads. There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.
These are confusing times, but that is no reason to adopt a pessimistic outlook on the potential of innovation to create enormously beneficial impacts. There is no question that today’s economy and the technological changes that power the economy have created a significant number of new problems like worker retraining that we must solve. We must discover new solutions to these new problems and this will require innovations of many kinds.