The Inside Story of Growth Investing at a16z

0:28You have to think long term. is it's the ultimate measure of conviction. So if that individual has conviction and gets feedback from the partnership and maybe the feedback is constructive or negative and still wants to make the investment, that's conviction. Today, we're replaying a conversation from 20VC with Harry Stebbings featuring A16Z general partner, David George, from our growth team. David shares how he thinks about breakout growth investing, why edge comes from non-consensive views on market size, how to underwrite upside in competitive markets, and what separates pull companies from push companies.

1:01He also dives into unit economics, deciding when to double down, and how single trigger decision making shapes investment conviction. They round out the conversation with SPACs, the rise of crossover investors, and how David manages pressure and competition over the long arc of an investing career. Welcome back to 20BC with me, Harry Stebbings. And what an episode we have in store for you today. I just love doing this one. It's one where the chat really completely went off-piste and we didn't stick to the schedule at all. But always a sign of a great conversation, so I'm thrilled to welcome David George, General Partner at Andreessen Horrors, where he leads their growth investing practice.

1:36Since joining in 2019, David has invested in the likes of Clubhouse, Coinbase, Databricks, Figma, Instacart, Robinhood, and TripActions, to name a few. David also sits on the board of Current, Greenlight, and WorkRise. And prior to Andreessen, David spent seven years growth investing at General Atlantic, where he invested in the likes of Airbnb. be CrowdStrike, Opendoor, Slack, and Uber. Again, just naming a few. I'd also want to say a huge thank you to Ariel at TripActions and Ali at Databricks in particular. Some amazing questions and suggestions from them, and I so appreciated that. But without further ado, I'm now so excited to hand over to David George, General Partner at Andreessen Horowitz.

2:13Three, two, one, zero. You have now arrived at your destination. David, it's such a joy to have you on the show today, my friend. And I do want to start by saying a huge thank you to Angela Strange on your team and Ali at DataBrace for some brilliant questions, suggestions. But thank you so much for joining me today, David. Hey, thanks for having me, Harry. I've listened to Pod a bunch and love what you've done with it. Well, thank you so much. I still can't believe I actually get paid to talk to people like you. So it's a pretty crazy life. But I do want to start with some context. So tell me, how did you make your way into the world of venture and come to be leading Andreessen's growth fund today?

2:48Yeah. So, look, I grew up in Kentucky, very far away from the world of finance and technology. I was very fortunate. I had an awesome upbringing. My parents, I had an older brother. Went to college at Notre Dame thinking I was gonna be a lawyer. Thankfully, I went into the finance industry out of school instead. Eventually, I moved to San Francisco in 2008 where I started to first encounter the world of tech. And I joined General Atlantic about 10 years ago. At GA, I had the chance to invest in some amazing companies. Spent about seven years there. Companies like CrowdStrike, Uber, Airbnb, Open Door, Slack, and then some others that are a little bit lesser known, but really awesome companies like Benevity and Seismic.

3:24I came over to A16Z to start and run our new growth fund about two and a half years ago. Initially got to know some of the folks at the firm just from some overlapping investments that we had. So I think I knew Alex Rampell the best because we opened door. And fast forward to now, we're investing, had the chance to build a great team inside the firm and work with some awesome founders and companies here as well. I mean, it's been an incredible time since joining Andrew. So do you have to touch on the GA time there because GA is such a prominent kind of figure in the industry, but it's also a very different one.

3:53So I have to ask, you know, what were your biggest takeaways from your time with GA? And how do you think it impacted your mentality? Yeah, look, GA is an amazing place. I'm really grateful to the team there. You know, one of the foundational frameworks that I developed coming out of it was what makes a breakout or successful growth investment or sort of pattern recognition of what I look for. In almost all cases for me, that has come down to, you know, a great founder, and then a theory on busting through consensus view on total addressable market or TAM. The consequence of that is a company that grows faster, you know, faster and or longer than expected.

4:27So, you know, take my time here, take Roblox. The prevailing view when we invested was, hey, it's just a kid's game. Well, you know, we felt that they had a shot and still do at being something much bigger, a co-experienced platform, something that's much broader than games, much bigger than kids. One counterintuitive observation from my time at GA and my pattern recognition coming out of it is exceptional business models are just table stakes in growth investing. They're not actually, in my experience, what gives you edge in making great growth investments. So we don't take risk on investing in anything but high quality business models.

5:00But in my opinion, this is not where you generate outsized returns. You can make mistakes here, but it rarely surprises to the upside. So despite that, I feel like it's where 90 % of growth investors spend 90 % of their time. So coming back to the TAM point, total addressable market point, I can give you a couple more examples on forming non-consensus views and things that made successful investments for me. One of the flavors of this is the consensus view of total addressable market lags what's actually happening in the market. When I was at GA, the consensus defined the market wrong at Optane Emmets.

5:32There would be way more applications than historically. And, you know, the view of the software to support that just lag. So you could see it actually by looking at individual forward thinking companies, but not from looking at market research reports. You know, one of the more recent examples is Figma, which were investors in from A16Z. The simplistic way to look at their market is software for designers. But the historical definition of design and designers is actually pretty dated. Our view was that all front end engineers in the future will engage in design. And this is 10x plus bigger in terms of market opportunity than just defining what they do in the design space.

6:10So, you know, in both cases, it was a refined view of the addressable market that led to a conclusion that in the future that that will be much bigger than folks recognize today. I have to unpack a couple of elements here before we move on. I just want to dive in and touch base here. It's like you mentioned the element on business model. And I do want to touch on that because, you know, when you look at some companies, say a DoorDash of the world, it takes a while for the beauty of the business model to mature into what it is. So how do you think about having the mental plasticity to see what the business model can be versus what it is today when investing in growth?

6:46Yeah, look, DoorDash is a great example of this. You just led me right into a discussion of mistakes that I've made in the past, which could be like a 90 minute VC episode. But, you know, DoorDash is a great example of this. I missed a lot in DoorDash, not just the unit economics, the power of the market size, the localized network effects. But I would say the big piece on the unit economics for DoorDash is you could see early signs of it in performance of really mature markets that they were in. And you could see the localized network effects in action. So specifically in the South Bay suburbs, in the Bay Area, unit economics were very good.

7:20And they ran some experiments at the time that we were looking that demonstrated that they could actually get the unit economics much higher. The power of their market position allowed them to maintain strong unit economics on the restaurant side. And then they did some really innovative stuff, you know, which there were ideas around this, but it was early to see it on building consumer stickiness like loyalty program. And so you put all that together. And at the growth stage, you could see this had the potential to have really good unit economics, even though, you know, the trailing data around it didn't show it.

7:51You mentioned unit economics quite a lot there. My challenge is like, when do they become important? I'm using this session as an advice and a learning moment for me, but it's like, but at the early stage, sure, your tax may be super low, but you've got the most aligned customer base that you're marketing towards, and they will generally get a lot more expensive over time as you saturate that audience. But then also brand and word of mouth can come into play and they can reduce. So I guess my question is like, when do unit economics become central and how central are they to you? Yeah, look, at the growth stage, they're very important.

8:24The thing that we look for in unit economics is, you know, where are they now? And then as you scale up much larger, do you have a theory on why they're not going to get worse and hopefully that they get better? And so they're very important at the growth stage. Again, though I go back to the point of like what's driven, you know, outsized returns for me, the unit economics end up being sort of table stakes, right like you can get it wrong to the downside it's very rare that the company ends up with you know unit economics that are much greater than what you expected it's much more common that hey the growth of the company just exceeded all expectations so you know at growth stage when we invest we look very closely at them the challenge that i have and sorry we did have a schedule i'm just completely you know going off the challenge is like with the unit econ is like when you have the proliferation of capital that we have into the markets and suddenly founders have these budgets which are just eye-watering.

9:17Salone has raised a billion dollars. I mean, a billion dollar raise. Like, their need to be worried about CAC optimization or unit economic efficiency is just less because they've got a billion dollars in some cases. How do you think about and advise founders on how close they should pay attention to unit econ when they have this proliferation and capital support? Yeah, look, I think it's a great question and it's a function of market conditions, competitive environment. So, you know, there are instances where I'll tell founders that it would make sense to relax their criteria and maybe spend a little bit more in the name of growth if it's a hyper competitive market and it ends up being a super sticky customer base over time.

9:57But you mentioned Salona, I know the company a little bit. They're in an incredible market position. I think their business model is fantastic. I would view their future as very elevated levels of high growth. And, you know, there's not some looming intense competitive threat that makes them think that they should aggressively go burn a bunch of cash just to grow faster. In our universe, in each of those sectors, that makes it sort of the right size for us. I think one for me that I always find striking is that capital concentration on a per company basis. How do you think about bluntly how to get as much cash into the winners as possible?

10:30And what does that reinvestment decision making look like for like, do we really fucking double down? Or do we let the capital market support it and we play a nice role? You know, we've invested multiple times in many of our companies. So Coinbase, we invested three times, Roblox twice, Databricks three times, Stripe four times, TripActions four times. Every time we assess one of those new investments, we do it with fresh eyes. And so we call it re-underwriting. We mentioned the upside there and the multiple expectation or multiple desire. You know, the bunting, the challenges are so much cash.

11:00The prices are so high. It's just much harder to do those multiples with the entry prices that we're paying. I had Leila from Capital G on the show. She said the prices are 2x what they were a couple of years ago on average entry price for her. I'm interested, like, how do you think about your own price sensitivity today, given where we are today? Yeah, look, this is a fantastic question. I wrote a piece about this called When Entry Multiples Don't Matter. Talking a little bit, it touched on this and other things. I'll just talk to you about our process and then I can address the valuation points.

11:30So we first start, we assess the company, we assess the market, we assess, you know, founder, all independent evaluation. And so if those check out, then we spend a lot of time on valuation and scenarios and making sure that we see our way to target return. So the best thing that we can do is invest in great companies that are growing very fast because those afford you more degrees of freedom on valuation. And, you know, I talked about the upside scenarios, like they're the ones that are more likely to deliver upside scenarios. So one of the frameworks that we use and talk about a lot, and it's, you know, this is relevant for valuation because it speaks to the flavor of companies that we tend to matchmake with is, you know, we look for what we call Glengarry Glen Ross market structures.

12:12So, you know, the famous movie, this is like independent evaluation. So what that means is there's a scenario. Have you seen the movie? I haven't. So explain it for me. Okay. All right. It's sort of like a boiler room sales old school movie. So there's a scene where Alec Baldwin is presenting to his team their monthly sales competition. It's his famous line where he says, okay, here's the prizes. First place gets a Cadillac. Second place gets a set of steak knives and third place gets fired. And so we actually think most many or most tech markets play out in market cap in a similar way, where the leader captures the vast majority of the market cap creation.

12:49You know, if you're not the leader, it's going to be a challenge situation. So we look for those kinds of market structures. You know, this is very well known and well covered in, you know, consumer land companies like Google and Facebook that have clear network effects. But surprisingly, you can see it actually in a lot of industries that don't have network effects, but play out in similar ways. So in B2B, you know, Salesforce, Workday, ServiceNow, they command almost all the market cap in their respective markets. So the way we approach the valuation question is, you know, if we can get that point right and the company wants to work with us, you know, more often than not, we can reach an agreement on valuation.

13:22Now, you know, the biggest point is, you know, in a market where valuations are higher than they used to be, you have to think long term. So we think in five to seven year terms and try not to worry if we're off by a year or two on the valuation. Like that's a risk that I'm willing to take. If we underwrite something five years and it takes us seven years, I'm okay with that. The last piece is just tech markets are bigger than ever. And there's going to be a lot of market cap creation. And so if we're long term oriented enough, you know, we should be okay. You know, tech's about a quarter US market cap and that's just going to grow fast.

13:53Can I ask one? There's always a case where everyone's turned down a company based on price. What company have you turned down based on price that keeps you up at night? Oh my goodness. The most painful one is probably Qualtrics, which I mean, look, that's killer founders. And yeah, I remained friends with the guys. We turned it down based on price when I was at GA. They figured out a huge market hiding in plain sight, a sales model that totally worked, fast product velocity, all the things that we look for, big markets where they're the leader, business model that was exceptional at scale, long room to run.

14:25So that's a very painful one. I do love Ryan. Just never played golf with him. He's an absolute fiend. I do have to offer, you know, you said there about kind of entry price no longer mattering with that brilliantly kind of provocative title. I was taught, you know, I'm from the old school of venture, temporal diversification mattered too. And that was a core part of any portfolio. Today with deployment cycles, it doesn't seem to matter either. Do you think temporal diversification matters today? Or do you think it's about adjusting to the game on the field and being in the moment? Look, I think it's more about adjusting to the game on the field and being in the moment.

14:56And then we don't invest in hundreds of companies. And so our goal is not to be an index fund of the overall tech market. Like we just need to continue to outperform and do our best. And if we can see the path and get confident about the path to achieving our target returns, that's okay. Reserves are one way that you achieve temporal diversification. If you have more of your fund in reserves, you know, that stretches the deployment cycle of your fund over, you know, five years instead of two years or whatever the number is that naturally provides some temporal diversification. I have to ask, man, we mentioned the price changes and the increasing price we've seen over the last, especially a year, but last few years.

15:31You know, we've seen P hedge funds, crossover funds. I mean, everyone and their mother investing in late stage and pre IPO. I've got to ask, man, when you look at it, how do you think about this massive proliferation of capital at the late stage, especially with players who seem to be playing a different game in terms of return expectations, willingness to pay 2x what we pay? How do you think about this new landscape and how you win in it? Yeah, look, it's a great question. And first, I think there's a little bit of a misperception in the market about some of those firms who have been more aggressive recently.

16:06Their returns are pretty good. They've done a good job. I think a couple of things that we've done to adjust. So one, diligence processes and fundraisers, you know, they've gotten faster, to put it lightly. What that causes is it makes investors narrow the focus area of what they can cover in diligence. You have to have a prepared mind coming into things. And you have to be really smart about where you spend your time. So we always focus on the three or four things. I talked about business model being sort of a table stakes exercise for us. So that's typically one, maybe two of those things. But the real decision-making process will come around that view of future growth.

16:42So we have to be prepared to make those judgments faster and assess those questions quicker. I remember when I started at GA, it would be like, okay, a company's raising money, and let's take two months. and you turn over every single piece of minutia for a company, like that's, it's probably more efficient and better overall for the market that that's not the way it's done anymore because it's just inefficient all around. You know, on the competitive point, I think of us as playing the end game, like relative to some of the newer players. So we move fast. We pay fair market prices. You know, we can write very large checks and follow on into companies, you know, many times over the years.

17:19That's all what some of the newer players are known for. But because of the way that Mark and Ben have built the firm, We can also do a lot to help founders as they scale. And that is relevant whether the company is at Series A or the Series D in the growth phase. So, you know, we tend to matchmake with the companies who see us as being able to deliver more than just dollars. You mentioned Mark and Ben there. In terms of like investment decision making, how does that look like for you? Yeah, it's a little more on the informal side. We have a single trigger puller model, though. We have discussions and deep, robust discussions about investment decisions, but it's ultimately the call of the GP who's sponsoring the investment.

17:58I serve as a generalized specialist. I heard Paul Enright use this term recently. It works for us. And what that means in this case is I sit across all the industry groups. So, you know, we can measure the relative excitement of a B2B software company versus a bio company or crypto opportunity or consumer. And this is really helpful in sort of measuring relative excitement and attractiveness. So the other piece on investment decision making, and it goes back to the matchmaking point is, you know, we try and prioritize companies where there's still some degree of company building that takes place.

18:27So we can help companies given what Mark and Bennett built. And a big part of our decision making process is we have the luxury of partnering with our early stage GPs and deal partners across the firm. So we feel like we'll have unique insights into big trends or themes early from being a part of the early stage business. You mentioned the single trigger element there. I'm really interested because, you know, at the end of the day, you've just got to have the courage to pull the trigger and go. And it's a big, courageous moment to write that check and put your name to it. I guess, how did you approach that?

18:59How did you mentally get over that with your first? And would you have any advice? I remember with mine, I was shitting myself and mine was for a million dollars, not a hundred billion dollars. Well, it's better to be honest. I mean, it's better to be honest, man. Look, I totally agree. And like the first time I did that, I still remember, I mean, it's not, it was not a single trigger puller model at GA, but I remember my first investment there and I was panicked. Like, am I making the wrong decision here? I don't know. I've grown to get comfortable with it over time. I think the benefit of the single trigger, and this may be obvious, but the benefit of the single trigger puller model as opposed to committee decision making is it's the ultimate measure of conviction.

19:36So if that individual has conviction and gets feedback from the partnership and maybe the feedback is constructive or negative and still wants to make the investment, that's conviction, right? And if there's a committee model, sometimes, you know, one of the negative things that happens is they're selling. And so, because often a committee will look to the person and try and measure or gauge conviction. And so they're selling. And so my experience, I think it leads to less intellectually honest conversations and open conversations because, you know, there's some element of convincing that needs to happen as opposed to personal conviction building by challenging and, you know, asking questions and exposing concerns and getting feedback on those.

20:15This is a tough one, but do you think there is internal politics? I mean, there is at most firms, but do you think there is internal politics in Andreessen? Do you think there's anything that you or one can do to maybe prevent or minimize them? It's going to sound like I'm bullshitting because it's like the politics are pretty, look, if you're a single trigger puller model, lots of the politics come from shit like that, trying to convince people, trying to advocate your own ideas, trying to shit on other people's ideas because, you know, maybe there's a deal that gets done instead of yours. Why would that introduce politics if it's single trigger?

20:46Because it's like, I'd like this deal and I have conviction. So see you later. Rather than like, I have to get you on side. I'll vote for your deal if you vote for my deal. Yeah, no, that's what I'm saying. I'm saying the same thing. I'm saying the single trigger for the model eliminates the politics, right? Right. Yeah. And then the other thing that causes politics internally is like promotions path for people. And I think part of the benefit of the way that just the background of most of my partners being founders of companies is they've actually run companies. Like this is a typically a problem with investment firms.

21:15It's like superstar investors end up running the firm, whereas, you know, we, our firm is run by people who have run companies. Yeah, I do totally agree with you and see that one of many reasons I work alone. Well, that and, you know, no one likes me. But other than that, it's totally cool. Everybody loves you, man. I was fishing that, total fishing. I stepped right into it. Anyway, I do want to ask as well, like final couple, but it's like, you know, everyone's got a SPAC now. I've been tempted by 20 BC SPAC. I think that's so cool. But anyway, everyone's got a SPAC. How do you think about like the rise of SPACs, the SPAC market, whether it's good, bad, an opportunity?

21:51Look, I think SPACs are great for the company side. They provide another form of liquidity and getting public for companies. I counsel, I've talked to some of my company's founders about going down the SPAC route. And the thing that I say to them always is, it's a totally fine path to go down as long as it's not seen as a milestone and you're just ready to be a public company after you're done with it. So it's good from the company side. I think on the issuer side, it's valuable to the market if there's some uniqueness that comes along with it. So if there's a value proposition that's unique, great, it will be appealing to the right founders.

22:26If it's just a financial vehicle, I think the proliferation of so many SPACs will make it a little more challenging to generate really attractive returns in that market. Final one, you mentioned some of your companies. I spoke to some of your companies before the show and one, Ali, who I love, by the way. But Ali said to me, you got to ask this guy. He's been super successful and he's achieved so much. What drives you today? And how do you think about your relationship with money? On a plane last night and I was texting with Ali about something similar. It's not money is not what drives me. I love learning new things every day.

23:00I get the chance to work with the best founders in the world, building awesome companies, just like you. You know, I love my job. I work all the time. I do have a deep fear personally and paranoia of failure and I'm extremely competitive. And so returns and generating returns are one element of the scoreboard for me. Like, and I love that competition and I want to be the best. There's a mission, you know, mission side of our business too, which is generating great returns for our limited partners. So these universities, nonprofits, it's the same as you. They've entrusted us with their investments and I want to make sure I work as hard as I can to give them the best outcomes in the market so that they can use those dollars to good cause.