Ben Horowitz on How a16z Was Built

0:00If you look at the firm now what it is is it's a collection of the original and reasoned harwits where every market has a platform that's appropriate to that market and an investing team that is focused on that market and I think that that's the future venture capital. We're in this phase where it's such a profound change that anything you do will work at least for a while and so it's kind of hard to pass on any deal and at least so it's exciting. What we care about is is it a real breakthrough and how big can we help make it kind of win the market like those are the things that drive us. Today, you'll hear my 2023 conversation with Ben Horowitz, co -founder of Injuryson Horowitz.

0:43In the episode, I sat down with Ben to discuss what makes a firm last for decades, how AI is built differently and a future adventure in an AI -driven world. Let's get into it. Ben, thank you for being the first inaugural guest. That's a bad guy. Yeah, no, happy to be here. Thank you. Ben, we're just talking up of camera. There's some firms that are great for 10 years and then struggle. There's some firms that are great for 30 years, multi decades. What separates the firms? You can do that and what enables them to be great. Yeah, I think it's a combination of kind of the lasting parts like the culture and then he parts that change like the leadership.

1:26And so I think that, you know, if you just have a couple of smart investors, but no culture to speak of, then you're probably not going to do a great generational handoff and you know, that's probably 10 years. Is it kind of 10 years is a pretty good run for investors, you know, like maybe you stretch out out. Then, you You can transition it like Sequoia transition it from Don Valentine to Mike Moritz and Doug Leoni and Jim Getz and that worked. That transition worked well so they were able to kind of take the original culture and build on it and kind of grow it 20 years for the original guys 20 years for the successors and that kind of thing.

2:12That goes pretty well. You guys know spring chickens, you're almost 15 years. Yeah. How do you think about it for your firm? Yeah, so we're a little different in that we are organized in such a way where It's not really like Mark and I can have like very significant contributions without picking the investments because Yeah, we have I would just say more scale and more job functions at injuries and horror wets because we're kind of a product first and then a team of investors second, whereas the other firm I think is the opposite. Product meaning the product to entrepreneurs. So like what are we offering is where we start.

2:56And then the team of investors is kind of goes with that as opposed to where a team of investors and then like well, figure out what our product is as we go. So that's a very kind of different orientation. I've always thought of why a combinator is another example of a product firm in the sense that you could replace a lot of the investors they have over time and yet it still seems to work to some degree. I think that's right. Like I think they're probably, you know, the closest analog to us kind of spiritually. Yeah. So they're spiritually close to you, but they're much earlier and they dominate kind of like a company creation, whereas you do a lot of seed of course too, but you've played all stages.

3:37is have you thought about going after that space, like pretty hard, how you thought about where you situate in the ecosystem? Yeah, you know, it's funny, because we, Paul and us started, you know, around the same time, he started a little earlier, and, you know, we talked to him quite a bit during that phase when he was running like I'm a leader out of his house with Jessica, and, you know, I have to say, we never really thought about kind of being my combinator. And I think like a lot of it has to do, my philosophy of business is you have to start with, okay, what can you contribute that's gonna be important in the world that nobody can do better than you?

4:20And for us, a big thing that we had done is we had scaled companies built into very large size that wasn't really kind of Paul's experience, But he had thought super deeply about like the very initial kind of part of it. So I think that was the right thing for him to do and we did the right thing for us to do. And I think the world was better with us doing our thing and him doing his thing, but like he's got a great business. Totally. And so you're a product you're not like he and his success. Yes. Totally. The most venture firms are a collection of investors. is some of your collection of venture firms in some way where you have these distinct, you know, American dynamism and bio and crypto and games, these different practices.

5:04Should other firms, are you guys ahead of recovery and other people, other firms will follow you or talk about the evolution to that structure and why that made so much sense? Yeah, so it's interesting. So when we started the firm, there's a lot of conventional wisdom in venture capital, like there are only 15 deals a year that are we're going to make it to $200 million, you know, it's a cottage industry, you know, done by like you can only learn it through apprenticeship and all the, you know, a lot of concepts, which I think were probably correct at the time, but the thing that we believed then, and Mark kind of encapsulated a PC wrote in 2011 called Software Seating the World was the software industry was going to grow 100 -fold.

5:51And so 15 companies can be 150 companies and things are going to change. And so in order to kind of be the preeminent venture capital firm, you're going to have to be a lot bigger. So we kind of saw that from the outset. And so we set ourselves up to be able to kind of organize, reorganize, evolve. And if you look at the firm now, what it is is it's the right, it's a collection of the original and reason Horowitz where every market has a platform that's appropriate to that market and an investing team that is focused on that market. And I think that that's the future venture capital like when we think about who's really an interesting competitor, it's the pure crypto firm, the pure games firm, the pure AI firm.

6:41More than the generalist firm that's trying to cover all of that with the old structure. I think that's gonna be harder for them. Speaking of the future of venture, will venture firms consider going public or should they go OIC or like you guys or firms that achieve such level of scale? Yeah, so there's a real interesting alignment problem with going public if you're a venture capital firm and it's as follows. So if you look at Apollo or Blackstone or any of these guys private equity companies that have gone public, the public markets value them on their fee stream much more than on their investment returns.

7:24I think that's a safer alignment between the investors and the firms in private equity than it is in venture capital. I think in venture capital that can get super dangerous because even at 100X what it used to be, the entire venture capital market is not that big and is, you know, like the amount of capital versus the amount of great ideas, like we're already have more capital and great ideas. And as we saw, I think, with both Softbank and Tiger Global, if you try to change that demand supply imbalance, you just end up creating a mess. And so if you were a public, you'd have a strong incentive to create a mess.

8:09Well, so they went big and created a mess. You guys went as big in some ways, right? Your volume was very high. Your funds raised is very high. You went big in a much better way. Is the, do you just need to think? Well, we didn't go $100 billion. And then I think Tiger was raising $12 billion a year. So they were bigger than us, just technically. So yeah, look, we scaled to basically size our funds to the market opportunities. So the way we look at it is like in a two to three year time frame, how many great deals will we see in a category and then try to size the fun to basically cover that time period is kind of roughly how we do it.

8:56And that's certainly increased fun sizes, both fun sizes and the number of funds over the years. But it's still really contained compared to what you do if you're just scaling assets. So I think it's still way smaller than what Apollo or Vista or somebody would do in that kind of business. So I think that misalignment is pretty tricky for venture capital to overcome. Like I haven't figured out a way where you would overcome that yet. Right. So a firm like a firm that stayed diligent like a USB or diligence on fund size, you know, a benchmark or kind of stays that 500 or 250 respectively. They believe that they can get better multiples on that, you know, much more fund size.

9:47What do you believe that they don't believe that in terms of justify what why goes so much bigger? Yeah, so I think the market's just getting bigger. So I think the way to think about it is, If you believe the market was fixed at 15 companies, then that's exactly strategy. And we don't believe that. And I think that, I'm done allowed to talk about our fund returns because we're an RIA. But if you look at our funds, I think our larger funds have a times -like way out performed our smaller funds. And that's just kind of a function of, look, if there were 15 companies and now there's 150, then if you had a $400 million fund then maybe you need a $4 billion fund and to do the same deals.

10:31So if you win the same percentage of them and like that's just a simple math and I think that they're like they're different beliefs. I think benchmark beliefs that they believe we believe but we believe. And again, our mission isn't to, isn't necessarily fun turns. right? We have a mission to kind of help the best entrepreneurs in the world build the best companies that they can. And so, you know, we generally come at like the whole structure of what we do from that perspective. I think also like I could we could all get much higher salaries if we didn't organize the firm the way we did. But, you know, like our mission isn't to maximize a number money per partner or a missionist to kind of be the resource for building a great technology company.

11:22So it's just like a different point of view. And so how do you recruit such amazing partners if at other firms because they don't have these resources, maybe they can get higher salaries or there are certain perks of being at one of those firms. How do you think about recruiting the best talent, energy is in? Yeah, well, I think that people here, it's actually helpful that we kind of pay lower salaries to me because we get people who are on mission. And, you know, like there's a lot that goes into that. You know, like there's a, for example, there's this kind of thing in venture capital that a lot of venture capital say, well, spend all your time with your winners.

11:58Like we don't believe in that at all. Now, like if you look at a spreadsheet, that's exact right thing, right? Like because of whatever three winners are going to produce all the returns. But the way we look at it is, you know, someone, we're not so kind that we know who the winners are for a long time. The other thing is that, you know, we kind of have the philosophy is, like, we knew the job was dangerous when we took it. If we're gonna, if you're gonna take us as your partner, we're gonna be there until the bitter end. And like, that's, you know, having been very close to the bitter end myself from time to time, like, you really do need kind of support, or at least somebody to talk to when you're in that situation.

12:39and because, you know, just from a competitive standpoint, our whole idea is that we sell on reputation. Yep. And that's fundamentally important to our competitive advantage is to have the best reputation. So all those things kind of cause us to behave differently. And if you're not into that, if you're into the spreadsheet view of venture capital, then like you would hate that idea. So it actually works for us in that sense. And because you've spent the last decade plus building this brand reputation, there's lots of other things that you could do. You can get into things beyond venture, different firms, you know, some firms get into sort of more public investing, get into wealth management, they get into other products that serve, you know, kind of adjacent customers or sort of the customers in adjacent ways.

13:25How do you think about what makes sense to get into, first what doesn't make sense to get into, given that your brand enables these opportunities? Yes, so the way to think about, like what we've done so far and what we'll do in the future is the customer is the founder for us. So we start with the founder and the, you know, the initial promise is, you know, we're going to help you raise money. We're going to help you develop into a CEO. We're going to build you a network that's as good as Bob Igers. We're going to like help you train you into the job. and we're going to support you in every way that we can, you know, through our financial network to help you kind of build this company.

14:09And, you know, in our view, we'd like to extend that through the founders and tire life from the time they found the company to the time they become a philanthropist. And so anything in that realm, we feel like is, you know, kind of things that we ought to at least consider doing. and which ones we do and which order we'll see, depending on where the gaps in the market are and what makes sense for us. What thing we've talked about off -camera is that one thing that enables you to take such big swings or make these changes when the market changes is your unique approach to governance or control.

14:47When you talk about that relative to other venture firms. Yeah, it's interesting. It's kind of a concept that we got from a couple of people. One was Herbal and who I think And then there's Mark's father and well. Hey, we'll continue our interview in a moment after a word of Mark's sponsor. Turpentine VC is brought to you by CARDA. You know them as a captable company, but did you know CARDA is the world's largest venture fund administrator? It's true. CARDA's software -based approach takes fund administration out of the spreadsheet and into 2023 and beyond, with powerful solutions and intuitive interfaces all in one platform.

15:18CARDA's suite of products and expert services helps funds at any stage with up -to -date insights and automated workflows to get them to that next level. The future of VCs is already here and it's Carter. Learn more at carda .com slash turpentine. That's carda .com slash turpentine. And they both kind of gave us the same idea, which, so traditionally in venture capital, I think it looks a little like a law firm or kind of a lot of these partnership structures where you have shared economics and shared control. And like from a partner standpoint, there's a lot of, that makes a lot of sense in a lot of ways.

15:51We have a different structure where we're shared economics, but we've kind of centralized control. And that enables us by not having shared control, we can change the structure of the firm very easily. And if you wanna grow, like so if you wanna go in an integrated way, like you could have, though that's the Chinese subsidiary or whatever, and that's a whole nother entity, and we talk to them once every six months, That's not what I'm talking about. But if you want to grow in an integrated way with kind of single culture, single offering, then you have to be able to change the organizational structure as you get bigger.

16:35So like the structure that you had at 50 people is just not going to work at 500. And that's for any organization. But in order to do that, somebody's got to be able to make that decision with no politicking, no arguing, no, you know, like there'll be tears. because whoever loses power is going to be upset about it. But you have to be able to make those tough decisions to get to the structure that you need to be maximally effective. And that's just really hard to do, I think, because I don't know how you would do it with shared control. Let's get back to the future of venture. Let's say we're having this conversation 10 years from now or 15 years from now.

17:11Does venture kind of look, does the trends that are happening now continue to happen? Where there's just this bifurcation, you know, multi -stage firms become even more multi -asset firms that you get bigger and bigger and bigger and this sort of, you know, solo GP or small specialists on, you know, kind of as barbell or to new models come into play like venture studios really take off or do emerging technology like Web3 or AI really change the change how venture works or say more about the future. Yeah, not like all possibilities. I mean, like I think the kind of classical venture firm that is just like a collection of smart, you know, investors, I think that's probably run its course.

17:50So I think you have to be like a top end, like serious brand that can marshal resources and money and considered smart money and people want to follow. I put us in that category, Sequoia. There's that class of thing. And then there's people who are very specialized in a very kind of specific part of the market and know that network and have really great specific expertise and they'd probably be, you know, more early stage, I would think. And those two things seem pretty solid at least for the next five, 10 years. everything else a little more questionable. I think, you know, with the studio model, the, to me, the big problem with that historically, and, you know, I think Bill Gross was probably the, you probably the greatest practitioner of that historically, is that it's not idea, it's an idea of maze.

18:56And so, and it's very hard to run through the idea of maze if it's not your idea. And so like that's a, I think that tends to be problematic. That's kind of, it's a little bit of a design for the head of the studio's lifestyle and kind of capabilities, as opposed to what's going to make a great company. And so I don't know that that's ever going to work. And I thought Paul's genius was the ideas weren't his. And that's the difference between an incubator and an accelerator. And that I think just proved to be the right model. And the reason it's the right model is because whoever's building the company would better be their idea.

19:40When you identify an emerging trend, whether it's Web 3, whether it's AI, whether it's companies that get big and it's really big, really fast and it's during the pandemic, let's say. And some people are more prudent about it. Some people are more bullish. And I put you guys more in the the bullish camp Smart bullish but bullish and is the logic there that hey not everything's gonna work out But the things that work just work so much that it just really makes sense to be extremely bullish or I guess when you reflect on the past You know few years and things that you went really hard on If you were to do versions of again going forward in future now this AI wave of course How do you think about Writing trends and how hard to to read them?

20:21If you look at But the history of technology, almost everything eventually worked. Go back to 1999, 2001, all the dot bombs. That's a dumbest, ha, ha, ha, pets .com host. Like all that stuff. And then diapers .com sells for $800 million later. It was just a little ahead of its time. And I think the beauty adventure capital is you can make the bet. And if you're too early, you can make the bet again. So if the clean energy craze happened again, if you guys were around during that time, do you think you would have bet big there and just say, hey, we're 10 years earlier? Well, that one is a little different in that that was like a politically motivated market, which is a different kind of a thing.

21:14I mean, I think so we're big believers in software. And if there's a massive software breakthrough that has new applications or new models or these kinds of things and we'd certainly be all on that, anything like AI or crypto or what's going on in games, we'd bet that every time. I think climate was a little different. It wasn't software as material sciences, which has a different market dynamic. So it's kind of like, like there eventually became a small number of auto companies. There never eventually became a small number of software companies, despite what Larry Ellison and all those guys said that they're only going to be three software companies, all that thing.

21:59Because it's kind of like, it'd be like there's only going to be three novelists. It's a creative art form. It's got a very big design space. And so, you know, we think there, you know, if there is like a big change in how you can write software, which AI is probably the biggest change we've ever had, that's going to, yes, that's going to produce things. And we bet that all day, all the time, every day. And I think, like that's also the kind of value of being able to evolve the firm is, like people who knew smartphone network effects may not be the ones who really get AI, may not be the ones who really get crypto, et cetera.

22:41I know Marcus spent a bunch of time in AI right now. Talk about the AI strategy, how you're approaching AI in terms of there's both how you think about it from a investing perspective, but also does it change things at the firm more broadly? Yeah, well, it does change things at the firm broadly. From an investing perspective, it's kind of like, like, oh my God, we have non -deterministic computing. Like a holy cow. You know, like it's, it's a whole, every problem we couldn't solve with deterministic computing is now for grabs. Yeah. And that's like, you know, we've never seen anything like that.

23:15So from a firm perspective, I think, you know, we end up needing, okay, different expertise. We need access to different networks. We need different help for entrepreneurs. It's amazing. So many of the AI entrepreneurs are actually, they're not even engineers, they're like researchers. So this is a totally different type of cat to be starting a company. And what do they need to succeed and that kind of thing? So it's a very big, tidal wave kind of running through the firm and running through the industry, but we can be more excited about it. I mean, the other thing is like, we're in this phase where it's such a profound change that anything you do will work at least for a while.

24:10And so it's kind of hard to pass on any deal in that way. So it's exciting. Well, and that was true also of Web 3 for a moment. And when you think about Web 3, do you think, hey, it's just in a momentary low, partly sponsored by markets and developer activity is higher than ever? I've been struck just by how far ahead AI is of Web 3 just on terms of use cases and products. And yet, I've been ignoring AI up until the last year or so. And I was spending more time on Web 3. Like, what did I, was the financialization of distraction? Or I guess we're fucked on that a little bit, or what's your perspective on it?

24:43Yeah, so there's a few things. So one is like, AI happened overnight. Like this AI model started in 1943. So it was a long time coming. And it was at its like, I used to. Like working really well. I think with crypto, it started like in earnest in 2008. Like that was the 1943 moment. So it's a lot younger than AI. And like I think in fact, so in there have been, There have been kind of a variety of use cases. Some of them have been, so there's like this, what we call web three, and you know, a new way to build networks that's fair and not like doesn't tend towards these like very dangerous monopolies that control all information and all these kinds of things.

25:31But there's also kind of like a, because you can create money, there's a casino aspect which needs regulation and we've been kind of working with the US government to try and get the correct regulation. And so, you know, in its current state, I would say there's two things. One is we need performance to improve a lot, you know, and kind of gas fees to lower and performance to improve, so usability can improve and that kind of thing. And that we're really on the verge of, I mean, like I think we're going to see a hundred X improvement improvement of the kind of base infrastructure in the next turn in the next year.

26:12So that's awesome. The other thing though is the kind of regulatory regime and like what's possible and can we get clarity and so forth. And we're working on that both kind of domestically and internationally. But those are kind of things that in order to get very broad adoption that's going to have to overcome. Like AI is already getting broad adoption because like it works. Now the regulators are now moving in and you know very ironically oddly bizarrely talking about trying to ban open source which is probably the safest thing that could possibly happen in AI because you know the last thing if AI is this all -powerful thing then the last thing you want is it in the hands of one person or one company like that would be horrible and dangerous whereas Because it's open source, universities can work on it, we can understand it, it can be deployed.

27:08I often remind people, the last nuclear bomb that was launched was when only we had the nukes. That's a dangerous world with one person having the nukes. Now everyone has nukes and everybody loves nukes and we haven't had. We haven't had any nuclear activity and there's a very specific reason for that because everybody's got nukes and nobody wants to get nuked. And I think that AI is, to the extent that AI is a super weapon, that will also be true there. And so if you believe that, then I think what you want is open source. And I think if you want regulatory capture monopoly for yourself, you want to shut that down.

27:44You mentioned earlier that your peers is the best kind of specialist firms and you compete with those firms. Do you also see your peers or competitors firms, other multi asset firms that are not even like as you get bigger and bigger AUM, are there firms that you see yourself as veering into their space? No, so it's funny, because I've spent some time with both kind of the folks at BlackRock and the Nettopolo just trying to understand their structure and why they're probably like in these kinds of things. And I would say they are culturally, feel softly, operationally, the opposite of us. So like they're very, very price focused.

28:29They're optimizers, they're efficiency experts. Well, I can't care about any of that. What we care about is like, is it a real breakthrough and how big can we help make it, kind of in the market? Like those are the things that drive us. So there's nothing about what they do that would make them good at what we do and there's something about what we do that would make us good at what they do. So like I think, you know, we'll never get into that realm. Yeah. And when people focus so much on returns, it also, it's important to think about just the LP product. Like my understanding of the soft bank thesis was that this is a place that LP could plow a ton of capital and get some like consistent, you know, return.