A16Z's David George on How Private and Public Markets Fused Into One

24:32And then they're going to value you as such. And then they'll pick an exit multiple at year five and they'll apply it to 20 % growth. And they'll probably say at that point, you'll be 20 % margins and they'll be happy and they'll call it a day and they'll have your stock price be that. When in reality, if you're a great company like Databricks that's still growing north of 60%, you're worth probably three to four X difference in value if you grow 60%, 55%, 52%, 48%, 45%. Like it's probably like a three or four difference in how you're valued. And so I do think people like us with a longer time horizon in the private markets may have an easier time of actually grokking that very high growth rate.

25:16You know, Databricks is growing 65%. If you look at the public markets, you know, really only Palantir is, you know, a software company that's growing that fast. I think they're growing 70%. They're about the same size as Databricks. And their valuation multiple is 35 times or something like that. And so that's the one example where maybe public market investors are attributing a really high valuation to very high kind of hyper growth. But for the most part, I think it's pretty hard for them to grok that. And so, again, you know, we have conversations with the founders of these companies in the private markets.

25:48You know, I think we understand it. I think we understand multi-product. And you're less likely to find, you know, a full public market of folks who will give you credit for that hyper growth. I find this to be a very interesting observation. I mean, just generally public or private, it does seem like several generations ago, you assume, okay, here's a really big company. It's not going to be one of the fastest growing companies in the world. And you apply that sort of model mindset where you mark down their growth expectations. I mean, even Alphabet, I think in its latest quarter, actually had faster top line growth than it had in the quarter before, like on a year over year basis.

26:25So setting aside public or private, it does feel like there is just this phenomenon where really gigantic companies grow at shocking, shocking top line rates year after year in a way that maybe even still investors might not appreciate. I have a question for you, something I've always wondered. Okay, let's say one of your big portfolio companies goes public eventually, you know, Stripe or something like that. How does a GP or how does the firm think about selling at that point? Is it, okay, you're a private market investor, so you get out fairly soon, you don't want to hold that. Do they get distributed?

27:02And then it's up to the LPs to think about it. What is the sell decision like once a company is no longer private? Yeah, it's a great question. And by the way, to your point on these large cap, high growth companies, it's a really good learning for all of us that the very best companies can sort of defy your expectations and still grow fast, even though they're big. Like it's sort of the breaking of the law of the absolute highs of a company, like meta accelerated revenue growth to 30 % in the last quarter. Like that's shocking. Like a company that's worth almost$2 trillion can accelerate to 30 % growth.

27:35Same with Google, north of 20 % growth. So if you can find find those opportunities, I would say Stripe is a good example of this. Previous generations of this would be like Visa and MasterCard. If you had a strong thesis that those would grow at north of 20 % for 15 years, you would value it a very different way than if you thought that that growth would tail off over time. So yeah, I think it's great that you brought up Google and we think about the large cap companies to try and inform what could go right with the best of the best of the companies in the private markets for us too, not just over five years, but over 10 plus years.

28:09So to your question about distributions or selling, when our companies go public, our LPs, our investors tend to like to have distributions as opposed to us selling. Okay. Many of them have public desks or public operations on their own, and they would prefer to take the stock and manage tax consequences on their own. Or maybe they have a long book that wants to hold it. And so we tend to distribute companies. I would say, for the most part, when our companies go public, I'll speak from the growth fund. where we're coming in at a more mature stage of the company, just because a company goes public doesn't mean that we will exit.

28:44Now, we always seek to return capital to our LPs, and we want to make sure that we're doing that on an appropriate time horizon. But often, we'll find situations in the public markets where we think our companies are massively undervalued. I'll give you an example. One of our best companies was a company called Samsara, which does fleet management, video tracking for drivers. They're the market leader, second time founders. They were the founders of Meraki, which sold the Cisco. So they're an exceptional team doing great. They went public right at the tail end of 2021. And the IPO market was starting to freeze and they were the last IPO.

29:22And so we ended up being the largest buyer in their IPO. So all of the public funds, Fidelity, T-Row, some of them invested, but we ended up actually being the biggest buyer. And then we held that for a long period of time, even though it was in the public market. So we like to think about, you know, what is the future of the company, even if they're in the public markets? And we would bias to hold it a little bit longer if the founder is still running the company. We place a tremendous amount of value in founders running companies, which I'm happy to talk about. And if we think the growth prospects are really bright, you know, we'll tend to sort of bias to hold a little bit longer.

29:58What's the actual catalyst for going public then? Because if we think there's plenty of capital in the private markets, employees are generally pretty happy with their compensation. People can live with the capital cost. Why would you go public? Or what's the most common reason in terms of timing? Yeah, the biggest thing would be access to larger pools of capital. And you finally feel like you're making that tradeoff where the cost of capital in the public markets would just be much more attractive. And so you want to go do it there. So in the case of building, for example, data centers in space that will require a tremendous amount of capital over time, you know, you can get a lot of that capital in private markets.

30:42And, you know, maybe at some point it makes sense to tap the public markets to get that, you know, if you have huge ambitions. Sometimes it's easier to get debt and alternative forms of financing in the public markets as well. And then lastly, if you feel like the competition is really fierce for your employees, and I described that dynamic of quarterly RSUs and stock currency that might be a little bit easier to manage in the public markets, that would be another reason. It's not just employees. It's also if you want to do meaningful M &A, you know, there's probably a little bit of a benefit to being in the public markets and having a public currency that you can use where, you know, you don't have to debate with the sellers what the value of your equity is because it's in the public markets.

31:24You know, there's a there's a daily stock price. So those are a few of the dynamics.

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32:28Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen on Apple, Spotify or wherever you get your podcasts. Does the private market trend, does that hold as we see, you know, more and more tech is just about AI, right? And if there's one thing we know about AI, it's that it requires quite a lot of capital investment. So does that start to change the dynamics or the balance of power between private and public in your mind? It goes back to the same point, which is at some point, you know, the amount of capital required, it probably makes sense, you know, to be in the public markets.

33:11You know, I do think for large scale consumer businesses, I think there's some value in being in the public markets, you know, letting retail take part in the ownership of your stock, you know, having greater brand recognition. You know, we saw this recently on the B2B side as well with one of our public companies. And after going public, you know, sometimes there's sort of a brand benefit that you get. Brand halo, you're better known. You know, an IT buyer trusts a little bit more in your future. So there are some of those dynamics that exist. You know, AI, first of all, I think these have the potential to be some of the best businesses ever created.

33:47They're run by exceptional founders. They're building products that have grown at rates that we've never, ever seen before. So, you know, they're kind of speed running the process of company growth in a way, getting to be bigger and more consequential, much, much faster than the previous generation of companies. So, you know, maybe that means they should be in the public markets a little bit faster, too. Maybe last year at some point, OpenAI had a big tender and then suddenly no one could afford to buy a house again in San Francisco because all that money went into real estate. But there's a serious question, actually, and particularly acute at the AI companies.

34:21Is there any stigma of being an employee who sells some of their shares? It's like, all right, you can sell 25 % of your shares. And then it's like, I want to sell. It's like, what? You don't believe in the singularity? You don't believe that we're on the path to AGI? You think we're almost at the end of our mission and that our value won't be 10? Is there any anxiety on the part of employees at a real mission-driven, fast-growth company? Is it like, I want to dip my toe in the water. I want to hedge a little bit. I want to hedge my own company. I want to diversify away from my own company. Suddenly the founder isn't playing ping pong with you anymore.

34:54Yeah, exactly. Yeah, exactly. Yeah. You're not allowed to have lunch in the cafeteria anymore. I would feel like this would be a real phenomenon. I would be anxious about raising my hand. Yeah. I think everything in moderation. Most of the time, there's not like a stigma. And most of the time, it's not, you know, an opportunity to sell so much stock that it would be a vote of lack of confidence, if you will. Right. You know, if it's 25 percent of your vested stock and you've been there for two years, that means you probably have a ton of unvested stock. And so you're talking about a small proportion of your overall earnings.

35:25You know, we never really see a chance for employees to, it's never designed that way where employees say, oh my gosh, I'm out, I want to sell a hundred percent of my stock. In fact, you know, we don't have data on this, but I would suspect that in the public markets, you know, employees are probably selling out of their stock grants at a higher rate than in the private markets. And I think, you know, if you're at one of these companies in the private markets, you probably have a greater degree of confidence. If you're a good employee, you could always go to Google or Facebook or Meta and click coupons.

35:53But I think that most of the time, the good ones are true believers. We do have companies where the founders... One of my favorite things is when the founders just say, I'm not selling a share. And that is the ultimate extreme point of confidence. We spent time with a very high profile internet CEO of the previous generation. It's now a public company. and one of the meetings we were talking to him about secondary and he was so resolute. He was like, I'm not selling a share. Why would I sell a single share? I'm so confident it's going to go up. I don't want to do that at all. And that's a pretty strong signal of confidence in the future of the company.

36:28So we look for some of those signals when we invest. My partner, Alex Rampell, wrote a good piece many years ago to your point on real estate and buying a house and affordability that showed Bay Area stock prices of the mega cap stocks indexed against home values. And it's perfectly correlated. So home price appreciation is kind of tethered to the local economy in a way. And so it's not totally surprising that you see it move in that direction. Yeah, I think it's fair to say there are a lot of people in San Francisco right now who are excited about making money off of AI, and some of them have been doing so already.

37:10But on that note, how are you actually differentiating between AI models? I guess like this is a way of asking, how are you cutting through the hype? Because we see all these new companies launching. A lot of them use similar language. We see total available market, TAM, being thrown around quite a lot nowadays. How do you decide this is actually like a good business model versus this is just something that has AI in the name and is getting some attention? Yeah, so we're probably the largest investor in the AI industry as a firm. I think we're investors in two-thirds of the aggregate AI revenue.

37:52So if you were to just sum together all of the AI revenue of the companies in the private markets, we're investors in about two-thirds of it. So I think we have a front row seat to it. You know, first of all, I'll just start with the demand side. This is the biggest thing that we look to. There's a billion people plus using this technology, getting extremely large surplus or value out of it. The companies are the fastest growing that we've ever seen. You know, active users spend something like 30 minutes a day on it. And, you know, there's a tremendous amount of surplus that comes with that, even if you're paying as a subscriber for those.

38:25So on the consumer side, you know, I think the capabilities are extreme. They're very, very good. We're just now starting to scratch the surface on the capabilities of, you know, sort of doing work on your behalf. And so I think we're going to see a ton of progress on that front over the next year. But the demand signals that we see are probably not probably. They are definitively the best that we've ever seen in my career. you know, certainly much faster than, you know, the internet phase or mobile, social, you know, cloud, SaaS, e-commerce, any of those. So tremendous amount of value on the demand side.

39:03That's the biggest thing we look for on the supply side. You know, look, the build out there's, there's, there's a ton written about the build out of infrastructure that's required. It's, you know, it's larger than, you know, the U S highway system overall, you know, $5 trillion over the next five to seven years. The thing that I say about the supply side is we don't need to make the decision on investing every single one of those dollars as an industry today. The industry can monitor demand and we can make decisions about CapEx as we go. Cycle times are not five years long. Cycle times are more like 12 months.

39:36And so if we see a weakening of demand or a lack of payback in some of this infrastructure build out, then that's fine. We can adjust force. I think there's probably a misconception about the people who are in charge of these companies and at the center of all this, like us, we and they are all ROIC or return on capital minded people. We're not going to invest a bunch of capital if we think there's not going to be a high return from it. So to the extent that there is some overbuild or signs of a lack of demand to meet the supply, I think the industry will adjust. We've written about this before.

40:14Or if you contrast this build out with the fiber build out, so far, if you put a GPU or a TPU online, it immediately gets used. And this holds for actually very old GPUs and TPUs. Google has disclosed this about their TPUs that are 10 years old. You can pretty easily find pricing of two generations ago GPUs on the market. And the price of these have all held. So there are no dark GPUs. No one is building data centers that aren't being fully utilized right out of the gate. contrast that with the internet build out. The internet build out was characterized by dark fiber. And so you had to lay all this groundwork before you actually had any signs of demand.

40:53And so obviously there was a mismatch in supply and demand. So that's the sort of overall kind of view on supply demand dynamics. I'm very, very optimistic. I think we're in the early days of figuring out really interesting applications to build on top of this technology. And in terms of model capabilities, models are improving at an eye-popping rate. They can basically double their ability to complete long-form tasks over six to seven months. And so if you were to just arrest model development today, I think we would have the chance to build 10 to 20 years of really interesting applications on top of it.

41:32The big thing that happened in public markets so far this year is the absolute slaughtering of sort of non-AI companies and legacy software companies of various sorts and so forth. How are you thinking about companies that don't own a model that maybe have to buy intelligence from another company or so forth? Who, in your view, when you're thinking about private or public companies, who that's not an AI lab, what types of businesses survive and which ones are not going to survive if they don't own intelligence in the raw? Yeah. So I will cover both of these topics because I have pretty strong views on what's happening in the software market.

42:12And then we can talk about what the sort of future of companies that don't own a model is. On the latter point, we can cover that one first. Look, companies buy solutions, right? And so context is still king. In most industries, there will be companies that compound their knowledge of industry-specific workflows, industry-specific data that they attach to. And so oftentimes that won't be what the model companies choose to pursue. You know, customers buy solutions, they don't buy some discrete workflow or just a database or a system to take action. So the most important thing is industry context.

42:48You also need a throat to choke, right? I think that's going to be increasingly important for customers. You know, So support, maintenance, integrations, data partnerships, user community, I think are all important things for companies that are building applications that are not model owners. And I think in most verticals and many of the functions in an organization, there will be independent companies that do that. Model companies are going to be an arms dealer to most industries for some tasks or work that are highly horizontal or general. So something like general knowledge management inside of a corporation.

43:26The model companies are probably pretty well positioned for that. But things like legal work, medical work, customer support tasks, a lot of stuff that will happen in sales, accounting, finance. I think those are going to be independent vendors. And the model companies are going to be arms dealers to those. So that, I think, is the future of applications for companies that do not own models. I think it's a very bright future. We've invested a lot in some of these leading companies. But I think both the model companies and those companies will be big and successful. On the software side, yeah. I mean, look, the software industry has been crushed in the public markets.

44:05We can debate whether it's overblown or not, but I'll give you my diagnosis of the situation, not particularly on valuations of specific companies. But here's what's going to happen with the software companies in the public markets. I think the issue is not that there's going to be a ton of new software in the future. There is going to be a ton of new software in the future. The whole story of SaaS and cloud was that the market boosted 7x in size. And some of that was captured by incumbents. Some of it was captured by startups. The issue is, are the incumbents that are in the public markets going to actually be the ones that capture that?

44:40And by the way, I think it'll be much bigger than 7x this time. So why is it sort of a question of whether those incumbents have the chance to do it? First of all, it's probably going to be much harder for them to grow, right? All the new budget basically in any buyer organization is going toward AI initiatives right now. Now, it doesn't mean that they're ripping out their software systems. Gross dollar retention remains extremely high for these incumbent software systems, and I think it will for a while. But if you look since 2021, net dollar retention of these companies has steadily declined.

45:16If you look at the amount of revenue that the entire software industry is adding, in 2026, the amount of revenue that OpenAI and Anthropic alone will add is going to be greater than the amount of the total revenue added by all of the software market. Like that's SAP, Intuit, Salesforce, Workday, ServiceNow, all those vendors. So the growth is actually going toward AI initiatives. And so, you know, yes, they may not be getting ripped out, those incumbent vendors, but it's going to be much harder for them to find growth. So, you know, from a product standpoint, they're not going to get torn out, but they really run the risk of value getting built on top of them.

46:00So those are going to be systems of record, but you just build new vendors, build new products that can take action on top of those. And I think that's a real risk for the software industry right now. If building software, the process of building software becomes much faster, there's another dynamic where every vendor can basically increase the amount of SKUs they offer rapidly, massively. And so if you are a platform vendor of choice and you sell a bunch of software in this domain, chances are everyone in the nearby domains will also have those products and they'll all try to sell those new products and it'll get more competitive.

46:39So I think that's a dynamic that's really a risk for them. The most powerful change that I think is going to happen, which we're only seeing early signals of, is a business model shift. So when these technology shifts happen, you know, a new user interface, new workflows, new data that you access, that favors newcomers over incumbents. When you pair it with a business model shift, that massively favors the newcomers, right? Because it's so hard to react if you're one of the incumbents. And so the big shift, if you just take a spectrum of business models that's happened, you know, we used to sell license maintenance software.

47:18We moved that to, you know, seat-based subscription. Then with the clouds, a lot of companies have become consumption-based pricing models. And in the future, with AI in a lot of domains, it's going to be outcome-based pricing. You can see this first in the customer support industry because there's sort of verifiable tasks that those companies have to complete. But to the extent that we actually get to the point where the predominant way that enterprises want to buy is via outcomes and they can measure those results, I think it's going to be really tough for the incoming. David George, Andreessen Horowitz, thank you so much for coming on AdLoss.

47:53That was fascinating. Learned a ton and really appreciate you taking your time. Thanks so much, David. Great to be with you all. Thanks for having me.

48:12Tracy, I thought that was a fascinating conversation. So much there. And, you know, it's fun to talk tech, but also have it be such a capital markets heavy conversation. Yeah, I kind of the idea of software companies, their value resting in the fact that they're like convenient scapegoats for management. It's kind of funny in a dystopian way. I remember Steve Ballmer said that years ago when he was talking about why Linux wouldn't take off. Yeah. Because he's like, no, what are you going to just like, who are you going to get upset when your Linux goes down? Although then companies did, you know, Red Hat grew up to like professionally service.

48:44I thought that was very interesting, the idea of like outcome based pricing, but just also some of the numbers are staggering. Just like how big, you know, this is I've thought about this with like when people look at the public markets and they say, well, yeah, it's not that overvalued because, you know, most of the public companies are making a lot of money. If you were to sort of like build one index of big private and public companies, you would have a lot of market cap on companies that aren't making money yet. And that would very much like sort of skew your view of this sort of like total valuation of the universe of tech companies.

49:18Absolutely. Well, the other thing I was thinking is just that question of whether or not that kind of the balance between private and public starts to reverse. because so much of the excitement right now is about AI, which is spending billions and billions and needs huge pools of capital. I guess the counterpoint to that is there's a self-reinforcing trend in the private market, which is if that's where all the growth is, if that's where people are making all the money, it tends to attract even more capital. So I don't know, maybe AI means that private capital grows even more, and so AI can keep tapping it.

49:53There seems to just be an endless amount of money in the Middle East specifically. You know, it's like, oh, we're raising more from the UAE or Saudi or whatever that just keeps these companies private. If I were at like opening, I would be really anxious about selling in a tender. I would be like, I don't want to. I believe, I believe, I swear, I believe we're going to get there to ASI or whatever. I would be really uncomfortable about it tapping out and hedging my portfolio. Joe, you'd have to be very, very important for the founder to actually care about what you're doing with your shares. But I'm sure you would be.

50:26All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, David George. He's at DavidGeorge83. Follow our producers, Carmen Rodriguez at CarmenArmand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. And for more OddLots content, go to Bloomberg.com slash OddLots for the daily newsletter on all of our episodes. And you can chat about all these topics 24-7 in our Discord, discord.gg slash OddLots.

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