The Evolution of the Firm — with Ben and Marc

0:00It's just as hard to build a small, inconsequential thing as it is to build a giant world -changing thing. You work the same amount of hours, and so you might as well go for doing something important. Social media has become the dog and traditional media has become the tail, and they just get whipped around like crazy by all these shifting memes. We've basically recreated the original Fund 1, 7 times, so every team is like the original entries in the heart. So we really have seven injuries and horwits, but with common infrastructure, common LP relations, common brand, common culture. I think there's going to be a whole wave here, I think actually incredibly successful projects.

0:42This week we hosted our annual LP Summit, bringing together our partners, Portfolio, and the people shaping what's next in tech. As part of the event, I hosted an interview with Mark and Ben. We talked about the evolution of the firm, the state adventure, and how to stay ahead in an industry that doesn't sit still. Let's get into it. As a reminder, the content here is for informational purposes only. Should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16z fund. Please note that A16z and its affiliates may also maintain investments in the company's discussed in this podcast.

1:23For more details, including a link to our investments, please see a16z .com forward slash disclosures.

1:35Welcome to a live private viewing of the Mark and Ben show, our favorite married couple in venture capital. Yeah. Old, old, married couple. Yeah, that doesn't get along that well. The romance is long faded. This is what we all came here to see. Ben, let's talk about the evolution of the firm. You recently said that the VC industry has changed more since the inception of the firm in 2009 than in the prior 30 years. Let's talk about how our firm has evolved alongside that. What's been our Act 1, our Act 2, and where are we now? Yes, so Act 1, you know, we were walking into VC that hadn't changed.

2:11And one of the key things about it, if you looked at venture capital, it was the only asset class that had the same managers persistently being at the top. So anything else, you know, it kind of rotated out every five, ten years, the best mutual fund manager would change, or the best bond manager, whatever, best real estate guys. But in venture capital, the same firms that were the top firms in 1978 were the top firm in 2009. And the reason for that was the top tier firm got first pick on every deal. And so the whole thing that we faced walking into that was how do we get to the top tier? Because otherwise there was no reason to be in the business because you weren't getting returns.

2:57The same teams get that number one pick in the draft every year. And so that was the goal and we were coming from product companies. So we looked at it through the product lens and we said, okay, venture capital is a really good product, top tier venture capital, really good product for LPs, and really mediocre product for entrepreneurs. And so being entrepreneurs, we had been customers of venture capital. We knew what the product was. It was, you get a very smart person on your board. They have very interesting things to say for your first five times you talk to them and then you've heard it.

3:33And so we were like, okay, that's kind of underwhelming, given how hard it is to build a company. So our idea was to create a platform that enabled a founder to evolve into becoming a CEO. And there were many parts of that, but a lot of it comes down to, you know, what makes you feel like a CEO? What gives you the confidence that you can actually run a company when you don't know how to? And that became the networks that we built. Like, how can I call any CEO? How can I call any executive? How can I get to the US government if I need to? how do I feel like I've got a network like Bob Iger even though I just started a company on an inventor and so that was how we went about constructing the platform and then the other part of it was okay is there somebody who knows how to do this job that can help me and we brought in a lot of CEOs into the firm and then of course I wrote the book on like okay this is how you do it and so forth and so that was the original product.

4:33And then because we were used to like what do you do when you have a product you market it and that turned out to be a Completely novel thing in the industry and so I was kind of phase one and that's what got us into the top tier phase two was based on a article that Mark wrote called software is eating the world So Inventure capital from its inception in Andy Rackliffe did this wonderful study where he showed that there were 15 companies in any given year that will ever make it to a hundred million revenue. And the whole game was to invest in those 15 companies. So ideally you'd have a firm of maybe six to eight investors that would look for those 15 and that would be sufficient.

5:14And that was very true. And by the way, that's the right size conversation to make high quality investments.

5:26You 50 or 200 of these companies, and in order to deal with that, you had to be able to scale the firm. And that meant, okay, if crypto is going to be as big as software used to be, or AI infra was going to be as big as software used to be, et cetera, if every vertical was that big in terms of the potential returns, then you essentially needed that original firm addressing each one of those markets. and in order to be able to do that, and this is where we just ended up having an advantage that I think that we didn't even really understand at the time, but when we started the firm, we had shared economics like every firm does, but we didn't have shared control.

6:11And that gave us a giant advantage over every other VC that had shared control. Because if you share control, you can't scale because if you share control, you can't reorganize. And it's a subtle thing, but every CEO understands it. There's no way to scale if you can't change roles, responsibilities, the way the firm is structured, how it works. Because that'll be an everlasting negotiation because you're literally redistributing power across the organization. But since we kind of have a single decision point on that, it was very easy for us to reorganize, and we were able to scale, and basically feel the best team.

6:52And so our competitors, if you look at the top tier firms that were with us in 2009, none of them got to crypto in any real way. They're trying on AI, but they're way behind, and they'd mostly missed American dynamism entirely. And it's just because they can't reorganize. So what do you need if there's a brand new field? Well, you need new leadership in that category. You need new people on that team who know how to do that. And that means a lot of change. I think going forward, the way we're thinking about it is the goal now becomes, okay, if we're funding the majority of all the best new technology companies in the world, what do we have to do from a leadership position?

7:35One, we've got to make the regulatory environment conducive to being the best for America being the best in the world. Two, we actually need our own channel, which you're coming on to build for us. It's really, really important to have a voice and a way to distribute that voice that is not only the biggest in the industry, but one of the biggest in the world. And we feel like we've got a super social media podcast star on our team already. He's way better than Joe Rogan or anybody else. And then we have, as you've seen, a lot of other people are super compelling and who you'd want to listen to all the time.

8:11And so now mostly you're going to try and convert that into something that can be long lasting. We're looking at other things. We talked a little bit about, okay, how do we extend this American dynamism to American and her allies dynamism and take it internationally? And so that's how we're thinking about the next phase. Yeah, it's fascinating just to echo the point about the ability to reorganize and restructure. One of my first meetings with you guys about potentially joining the firm was with Caffin Boyle and we were talking about Mark the conversation that you and Caffin had around the meme and being able to move quickly around the meme that's president said, why do you talk about that?

8:48Yeah, so the information environment is highly fluid, so I give this whole theory. So the media environment used to be relatively slow. If you go back hundreds of years, took days or weeks or months for information to get out and then lots of changes happened to ultimately. like cable news brought about the 24 hour news cycle, and everything sped up, and political operations got these rapid response teams that you see now and these war rooms and so forth. You know, the new form of that is actually the social media controversy, at least my version of the theory, let me back up. Marshall McLuhan had this famous thing, the great media theorist.

9:13He said, if it's on television, it's a television show. And so it doesn't matter what the topic is, it doesn't matter if it's the Clinton -Lewisky scandal, the OJ scandal, whatever the hell it is, or some celebrity thing, or nuclear war, or whatever. If it's on TV, it's a TV show. And it gets basically packaged up by TV producers as a TV show. And you see this, by the way, when everything happens, everything now has a theme song. Warren Middle East, duh, duh, duh, duh, duh. You know, anything on television goes through the moral arc of a television show, right? They want to go through these kind of moral arcs.

9:38The same moral arc that you see on like a television drama. They want to fight a real life, and so there's shame, and then there's redemption, and there's this, and emotion, and the interpersonal relationships, and the soap opera aspect, and all this stuff. And so those of us who've been on planet Earth for more than 20 years or something, have been living life basically in this extended television show. So extend McCluen's idea of what's happened now in a social media -dominated landscape, which is if it's on social media, it's a post, right? So if it's on social media, it's a tweet, right? Or it's a TikTok video, or Instagram photo, or something like that, it's a post.

10:05And so what do we know about the social media? What's the show equivalent of social media? It's a controversy, right? It's a blow -up, it's a dust -up. It's a, what would the kids call it? It's a... Dunk of. Yeah, it's like a dunk that leads to backlash, and then a mob forms, and then they're skip -goating, right? And so it's this thing. It's this predictable pattern. And the problem is, like, we all get pulled emotionally into these things, and so it's hard to objectively observe what's happening, but you can lift yourself up a little bit for a few weeks and watch what happens. It's like every new thing that happens basically now has a two or three day arc.

10:31You can literally graph it because it's like this viral moment where something just goes like parabolic and it's just like at that moment we call this the current thing. It's just like the most important thing in the world. And literally it's just like whatever happened today. And then basically what happens is it's a chart like that and then it's basically this fall off. It's like a half life of a drug or something, right? Where it's like this two or three day collapse and then basically it's supposed to be a show it's two or three days. The mob goes around, he defines the scapegoat or it doesn't, and it goes through a cycle.

10:53And then routinely two or three days later It's just boom. There's a new thing like that. And it's like the most important thing, again, the most important thing that has ever happened. And I've always wanted to build, I'm friends who tried this and I went like the internet weather report, right? And it would just be just constant. You know, it's just like hurricane after hurricane after hurricane of these things coming in. And so like that is the media environment that we live in. And you can either as a participant and kind of the narrative formation shaping process you can either choose to be part of it or not.

11:17And so part of it is like you have to be in the mix. And you have to be, if you're going to get a fight with people in that environment, like you have to be able to fight in that context. And then I think the other thing that Eric was really good at is that just leads to I think a adrenal fatigue Right, which is like the human psyche and limbic system can only go through so many panic cycles It's like for the first five. It's like really exciting and then after a thousand of them you just like my god And so that's led to the rise of this other thing that's happened right which is the long form right the long form podcast And this is the really remarkable thing has happened is the cliche is everybody has burned out attention cycles But the other side of it is the three four five six hour podcast and what's amazing by the way about it if you talk to Joe Rogan or Lex Reedman or whatever, they get these stats from YouTube about completion rates.

11:55And they have incredibly high completion rates, like a very large number of people watch those things all the way through. And so there's this other side of it, which is people are hungry for substance, I think, in large part, because otherwise all they're getting is a continuous panic. And so if you can step back and provide the substance, you also really stand out, but it's counter -programming on the complete opposite side of the spectrum. It's like candy versus nutrition. And the way to connect it back to, or restructuring is that American dynamism is an example of sort of a framing, of phrasing, of packaging, of ideas that Catherine and team helped, but together that started to get a lot of resonance, and we were able to move fast in creating a firm product.

12:29Oh, yeah, another really key point, which is because the internet meme viral sort of blow up cycle time is two or three days, like the internet media world just evolves much faster than ever. I mean, television needs to evolve annually, you know, they literally have like their end -of -world out in every fall you get to see the new shows, because the internet runs on these sort of panic cycles, it's basically this continuous turn of cultural formation of propagation. And then what is done, those of you may know, there was this concept of military strategy called the Udalupe, which is this guy John Boyd, who's sort of redefined sort of what's called maneuver warfare.

12:56And he had this idea that basically speed matters enormously in warfare, which people didn't used to believe, but he said it does because it gets to the psychology of what it's like to be a participant in war. And he defined this loop called the Udalupe, which is observed, or he decided, act, which is the process that you go through to basically as a leader of anything to try to figure out what's happening in the world, make a decision and then act in the decision. He has this theory of warfare basically says, whichever commander or any of their side has the fastest utaloop has a very good chance of being able to win the war And so the reason is because if you can fundamentally get through your utaloop faster than the other guy Then basically what happens is you can get inside their utaloop So if you're going much faster than basically what happens is by the time they're processing information You've already decided and acted and then they actually can't decide an act Then they have to start over from scratch to reprocessing information and then you compound it You decide an act and then you said at the limit what results is like basically emotional breakdown and this is why Twitter is broken down legacy media.

13:47This is exactly right. This is what's happening like a media. This is what Twitter did. And it's still doing a legacy media. And so again, people get wrapped up. And if you just take a step back and just watch like a media or read a newspaper, a huge amount of it is you're just reporting what happened on Twitter. Right. And this literally reporting I would happen on Twitter like yesterday or last week or the month before. But by the time they do that, what's on Twitter has already shifted, it's already evolved. And so traditional media, social media has become the dog and traditional media has become the tail.

14:10And they just get whipped around like crazy by all these shifting memes. And so it turns out if you can control the meme, it turns out you can also control the media, right? Because that's how they're taking their cues. That's what they're getting is they're literally reporting on the internet. And so it's the wage kind of punch in and take control of the narrative. And Marxist terms, we must seize the memes of the... Yeah, that's exactly. Me and St. David have just a... Amazing. Going back to firm evolution, some firms haven't changed at all in the past 10 years, 20 years. They're kind of a problem, yeah.

14:38They're proud of sort of sticking to it and sticking to the craft. And without putting anyone down, One, we share more about why it's important for venture firms to always be evolving. Well, I mean, the world is evolving. And look, you could be great at consumer internet, network effects businesses, and there aren't many of those to fund anymore. So like, if you didn't change, you're kind of irrelevant. Like, when AI started in the firm, Mark and I were in like a daily kind of call panic, like, okay, we're going too slow. What are we going to do? We were talking to Martin every day. We're like, okay, we got to build a research team.

15:16We've got to like retrain. We're going to test every GP on AI. I make sure they know what the hell it is and like how everything is working and so forth. And that was the whole firm. Like this is such a big wave. Everybody's got a new stand -inset, a very, very deep love. We even have people on our tech talent team. We're like studying AI to figure out like how to use it and so forth. And it's a little bit of an irony about venture capital is that But historically, the firms haven't been, although the invest in innovation, they themselves haven't been very innovative. I think a lot of it goes back to how they're structured.

15:48Yeah. And what do you say to people, you've noticed this in other industries in New York, and it's a pleasure to say, hey, once these firms scale like in recent, like some of the others, scale to an amount of capital and your management, that's just too big to generate significant returns that this has trade off, how do we think about that right balance, or what do you say to those people? Yes, look, I think if you scaled it all in a little team of generalists, then that would be very true. But if you look at what we've done, we've basically recreated the original fund one seven times. So every team is like the original Andrews and Horowitz.

16:22So we really have seven Andrews and Horowitz's, but with common infrastructure, common LP relations, common brand, common culture across those. And that basically enables us to be the best small firm and with the power of the biggest firm in the world at the same time, and that's reflected in the returns. Yeah. The other critique, which is a very valid critique for a lot of investment management, is firms get large. A common arc of like a hedge fund or something like that, is when you're small, it's just like there are these micro opportunities. There's these small cap companies, and you get this information edge on these little dollar investments, then you can shoot the lights out in terms of percentage return on small amounts of money, and then based on that record, you raise large amounts of money, and then at that point, those small cap things no longer move the needle, and then you find yourself basically investing in only make a cap companies and then you don't have an edge in returns collapse.

17:09And so that's like a time on our tradition and public market investing. The thing that I think is different about venture is that the aggregate dollar upside opportunity on an early stage venture deal is as big as or bigger than the aggregate dollar upside opportunity on a very late stage deal. And the reason is because of the scale effect of an early stage company that really makes it, right? And so if you can make a $5 million investment in a series A or C of an early stage company and you can own 20 % of the company and then it goes to 100 billion or a trillion in market cap, like just the raw dollars that get generated off of that are so big, they're as big or bigger than the raw dollar investment opportunity off of a 100 billion dollar investment or something.

17:42And so, so weirdly, like from a time standpoint, it makes just as much sense for like better me to spend time with early state companies today as it did when we first started the firm. Just in terms of just raw economic incentives. And in fact, that is actually how we spend time. I mean, we do spend some time with the later state companies, but we still spend a lot of our time with the very early state companies. And I think that will always be what we do. Yeah. And then by the way, that's where we have higher impact, too. I love Databricks, but I was massively impactful early. And now, like I call Ali and I say, good job.

18:11Yeah. Before we were saying, oh, it's amazing how Injusin does so much, but they don't fully appreciate how much we don't do, or how much we say no to, in terms of experimenting in other asset classes or things that could stray us away from the core mission. Yeah, look, I mean, I think we are who we are. And we are probably, maybe the most, make the only mission -oriented venture capital firm where like our goal from the beginning was to help people build better companies and more of them. Mark and I, this is one thing we really see eye to eye on, although we disagree on a lot, is as a human endeavor, doing something larger than yourself, trying to make the world a better place by building a company and doing incredibly hard work and assembling the best people you know, like there's nothing better than that.

18:54And our job is to make that easier, make people more successful with it, make those companies better places to work. And that's all we want to do. So like sometimes things will come in, should we be in private equity and we're like cutting a company in half and that kind of thing is just so off culture, off mission for us that it's probably, you know, even if we can make a lot of money, it might not be something we want to do. And this is my first OP summit and some OP's have come up to me and asked why I joined the firm, relevant to any other firm, and besides the obvious reasons of being the best firm, This firm is also the most ambitious and it comes from the top.

19:26It doesn't have sort of Incompancy sort of problems of being complacent you guys are always striving for more and we hear about the things that Work out and mark on Tbpn said yesterday something like we try some things that don't work out too and we just bury them in the shed Behind the shed pretend they never have it. Talk a little bit about our experimental culture and either examples of things that didn't work or just how we think about making sure that we're not being complacent because we're incumbent. I think it goes back to the mission in that we have to think about how we fulfill our mission and to really get better and better at that.

20:00It's kind of just like an ethosan and ethic that we have. I don't know that we think about it that often. We don't sit around and go like how are we going to innovate? We just look at the world and say, okay, how do we do a better job at what we do? The other thing that Mark and I learned really early on is that if you're building a company or firm, it's just as hard to build a small, inconsequential thing as it is to build a giant world -changing thing. You work the same amount of hours, and so you might as well go for doing something important. And so that's just our orientation. I don't think we spend that much time on it.

20:38It is a little bit advantage of how we're organized that if you're an equal partnership with equal control, then doing something new gets very hard because it's this long, complicated discussion and there's all these people who can say no. I think we saw that a lot in crypto. Chris, it was Chris's idea. Chris's, I think this crypto thing is important. We should do a fun, and we're like, okay, let's do it. Let's become an RIA and so forth. But it was just a conversation between me, Mark, and Chris, there was no other thing that had to happen. Whereas I think at the other firms, like when that came up, they're like, oh God, we're gonna have to report on this stuff and we're gonna have to put in all these systems to be an RIA and we're gonna be blah, blah, blah, blah, and they never did it.

21:20So I think some of it is just like, we can move fast because of the way we're structured. You know, so there's a lot of overlap, I think, with what we see with Founder mindset in terms of people who run companies. And if you go back 20 or 30 years, the sort of accepted conventional wisdom was the founders shouldn't run their own companies, right? And specifically, the founder didn't get a company started, but then you bring in a professional CEO to run the company. And there were really, I think, two arguments as to why that needed to happen one was because the founders didn't have the skill set and experience, which our firm has built in large part to deal with.

21:46But the argument that I heard a lot was founders basically are too emotionally locked in to what their baby does. They're too like locked in, and they're not willing and able to change. They're not able to be like a clinical enough analyst of a business situation. And so they're not willing to change, whereas if you have a professional CEO with all the top notch training experience, you know, when circumstances change, they have the skill set to be able to change the company. I think what we found in people who run companies is the opposite is true, which is that professional CEOs are often very good at running a status quo business, but when things change, they have a very hard time reacting and we could talk at length about why that is, but that has been the pattern.

22:18I like to have a whole book on that. Yes, exactly, exactly. But the other thing is it turns out that at least the really good founders of a company, and I think this is true of how bad I think about it here, you remember when it was nothing, right? So you remember when it was nothing, and you remember that everything that you have as a consequence of some risk that you took and some adventure that you went on. That's the only reason you have anything is because you did new things. And so if you have that mindset, you just naturally want to keep doing new things. And in fact, it would drive you crazy to ever be told that you couldn't do that.