E1: Ben Horowitz on What Traditional VC Gets Wrong

0:07Welcome to Turbentine VC, a podcast where we discuss the art and science of building successful venture firms, investor to investor. I'm your host, Eric Tornberg, an entrepreneur, investor, and co-founder of Village Global, OnDeck, and Turbentine. Why another VC podcast? Of course, there's already a lot of coverage of who the top VCs are and how much money they're betting on different companies and industries. But I realized there's very little on how VCs actually build their businesses and their firms, including fund strategy, how they manage the nuts and bolts of governance structures, how they think about generational transition, things that I talk about with investor friends behind closed doors.

0:43So what does it take to build an exceptional venture firm? And will the great BC firms of tomorrow look very different from the great ones today? If you're interested in these questions and want to get an inside look at how the BC world works, then this show is for you. On this show, I talk with founders and managing partners of top firms like Sequoia, A16Z, Benchmark, Founders Fund, Kleiner, Thrive, GC, and more. But for our very first episode, I'm thrilled to share my conversation with one of the most influential and powerful investors of the last decade, Ben Horwitz, co-founder of A16Z. Of course, Ben needs no introduction, but as a refresher, Ben was a product manager at Netscape, where he met Mark Andreessen.

1:22Later, they co-founded Opsware, which was acquired by Hewlett Packard, and then they co-founded the venture firm Andreessen Horwitz in 2009. Since then, the firm has grown to hundreds of employees, many billions of dollars under management, offices around the world, and has often rewritten the playbook of how a venture capital firm is supposed to look and act. Fun fact, we recorded this interview at their original office in Menlo Park. While A16Z gets plenty of coverage in tech media, it's rare for Ben to share directly how he thinks about the business of building A16Z and where the firm and future are going.

1:51We discuss why Ben considers Paul Graham's Y Combinators A16Z's closest analog spiritually, why they're so big relative to other firms like Benchmark and USV, who their competition is, spreadsheet VCs versus people first VCs, software as a creative art form, their AI strategy, the next phase of crypto, how they think about LPs, wartime VCs versus peacetime VCs, and more. If you like what you hear, do subscribe and leave us a review. Otherwise, let's get into my conversation with Ben Horowitz. Ben, thank you for being the first inaugural guest on this podcast. Yeah, no, happy to be here. Thank you.

2:25Ben, we're just talking off 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-decade. What separates the firms you could do that and what enables that to be great. Yeah, I think it's a combination of kind of the lasting parts like the culture and then the parts that change like the leadership. And so I think that 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 that's probably 10 10 years is a pretty good run for investors.

3:09Maybe you stretch that out. Then if you can transition it, like Sequoia transitioned it from Don Valentine to Mike Moritz and Doug Leonie and Jim Goetz. And that transition worked well. So they were able to kind of take the original culture and build on it and kind of grow it. you know, 20 years for the original guys, 20 years for the successors and that kind of thing. So that goes pretty well. You guys are no spring chickens, 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 like Mark and I can have like very significant contributions without picking the investments.

3:57because we have, I would just say, more scale and more job functions at Andreessen Horowitz because we're kind of a product first and then a team of investors second, whereas every other firm I think is the opposite. Product meaning the product to entrepreneurs. So what are we offering is where we start. and then the team of investors is kind of goes with that as opposed to we're a team of investors and then like we'll figure out what our product is as we go. So it's very kind of different orientation. I've always thought of Y Combinator is another example of a product firm in the sense that you could replace a lot of the investors and they have over time and yet it still seems to work to some degree.

4:43I 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 uh company creation whereas you yeah you do a lot of seed of course too but you play at all stages have you thought about going after that space like pretty hardcore how have you thought about where you situate in the ecosystem yeah you know it's funny because uh we paul and 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 Y Combinator out of his house with Jessica.

5:24And, you know, I have to say, we never really thought about kind of being Y Combinator. And I think like a lot of it has to do, you know, my philosophy of business is you have to start with, okay, what can you contribute that's going to be important in the world that nobody can do better than you. And for us, a big thing that we had done is we had scaled companies, built them to very large size. That wasn't really kind of Paul's experience, but he had thought super deeply about 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.

6:04And 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 yeah and so you're you're a product you're not like he and his success yes totally the um most venture firms are collection of investors some of your collection of venture firms in some way where you have yeah these distinct you know uh american dynamism and bio and crypto and uh games these different practices should other firms think are you guys ahead of a curve 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 uh there's a lot of conventional wisdom in venture capital like there are only 15 deals a year that we're going to make it to 100 million dollars you know it's a cottage industry you know done by like you can only learn it through apprenticeship and all the a lot of concepts which i think were probably correct at the time but the the thing that we believed then, and Mark kind of encapsulated it, PC wrote in 2011 called Software is Eating the World, was the software industry was going to grow a hundredfold.

7:14And so 15 companies can be 150 companies and like things were going to change. And so in order to kind of be the preeminent venture capital firm, you were 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 right. It's a collection of the original Andreessen 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 of 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, more than the generalist firm that's trying to cover all of that with the old structure.

8:11I think that's going to be harder for them. Speaking of the future of venture, will venture firms consider going public or should they consider like a YC 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. I think that's a safer, you know, kind of alignment between the investors and the firms in private equity than it is in venture capital.

8:57I 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 already have more capital than 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 public, you'd have a strong incentive to create a mess. Well, so they went big and created a mess, but you guys went as big in some ways, right? Your volume was very high.

9:39Your funds raised is very high. You went big in a much better way. Would you dispute the credit? We didn't go$100 billion big. And then I think Tiger was raising$12 billion a year. So they were bigger than us just technically. So yeah, look, we've scaled to basically size our funds to the market opportunities. So the way we look at it is, look, in a two to three year time frame, how many great deals will we see in a category and then try to size the fund to basically cover that time period is kind of roughly how we do it. And that's certainly increased fund sizes, both fund sizes and the number of funds over the years.

10:27but it's still really contained compared to what you do if you were just scaling assets like so we i think it's still like way smaller than like what apollo or vista or somebody would do in that kind of business um so yeah 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 that stayed diligent, like a USV or diligent on fund size, you know, a benchmark or kind of stays at 500 or 250 respectively, they believe that they can get better multiples on that, you know, much smaller fund size.

11:11What do you believe that they don't believe that in terms of justify why it goes so much bigger? Yeah. So I think the market's just gotten bigger. So I think the way to think about it is if you believe the market was fixed at 15 companies, then that's exact right strategy. And, you know, we don't believe that. And I think that, you know, I'm not allowed to talk about our fund returns because we're an RIA. But, you know, if you look at our funds, I think our larger funds have at times like way outperformed 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 dollar fund um and to do the same deals uh to or to win at if you win the same percentage of them and um you know like that's just a simple math and i think that they're like there are different beliefs i think benchmark believes that they believe we believe what we believe um and again look 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.

12:23And so we generally come at the whole structure of what we do from that perspective. I think also we could all get much higher salaries if we didn't organize the firm the way we did. But our mission isn't to maximize the number of money per partner. Our mission is to kind of be the resource for building great technology companies. So 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, you know, there's certain perks of being at one of those firms. How do you think about recruiting the best talent at a reason?

12:59Yeah, well, I think that, you know, people here, it's actually helpful that we kind of pay lower salaries to me because we get people who are on mission. They're aligned. 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. Like we don't believe in that at all. Now, like if you look at a spreadsheet, that's exact right thing, right? Like because the whatever three winners are going to produce all the returns. But the way we look at it is, you know, several, one, we're not so confident that we know who the winners are for a long time.

13:39The 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 till the bitter end and like that's you know having been very close to the bitter end myself um 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 and because our you know just from a competitive standpoint our whole idea is that we sell on reputation yep um that's fundamentally important to our competitive advantage is to have the best reputation.

14:15So 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, 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, right? Different firm, some firms get into sort of more public investing, get into wealth management, they get into other products that serve kind of adjacent customers or serve their customers in adjacent ways.

14:49How do you think about what makes sense to get into versus what doesn't make sense to get into given that your brand enables these opportunities? Yeah, so the way to think about 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 initial promise is 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 Iger's. We're going to help you, train you into the job. And we're going to support you in every way that we can through our financial network to help you kind of build this company.

15:32and you know in our view we'd like to extend that through the founders entire 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 you know which ones we do in which order we'll see you know depending on you know where the gaps in the market are and what makes sense for us. One 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 sort of governance or control.

16:10Why don't 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 Herb Allen, who you know, I think, and then the other was Mark's father-in-law. Hey, we'll continue our interview in a moment after a word from our sponsors. 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, you know, that makes a lot of sense in a lot of ways.

16:44We 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 of the firm very easily and if you want to grow like so you know if you want to go you know 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 you know once every six months or that's that's not what i'm talking about, but if you want to grow in an integrated way with a kind of single culture, single offering, then you have to be able to change the organizational structure, you know, as you get bigger.

17:27So like the structure that you had at 50 people, it's 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 like 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 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.

18:03Does venture kind of look, is it, 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 just get bigger and bigger and bigger and this sort of uh you know solo gp or small specialists on you know kind of this barbell or do 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 no like all possibilities i mean look i think the kind of classical venture firm um that is just like a collection of smart you know investors like i think that's probably run its course so i think you have to be like a top end like serious brand that can marshal resources and money and um considered smart money and people want to follow um you know i put us in that category sequoia um you know 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 ten years everything else a little more questionable I think you know with the studio model the And to me, the big problem with that historically, and I think Bill Gross was probably the greatest practitioner of that historically, is that it's not an idea.

19:46It's an idea maze. Yeah. And so it's very hard to run through the idea maze if it's not your idea. And so 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 was 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, it better be their idea.

20:31Yeah. When you identify an emerging trend, whether it's Web3, whether it's AI, whether it's companies that get big and it's really big, really fast 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 bullish camp, smart bullish, but bullish. And is the logic there that, hey, not everything's going to 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 few years and things that you went really hard on, if you were to do versions of, again, going forward and future, now this AI wave, of course, how do you think about riding trends and how hard to ride them?

21:13If you look at the history of technology, almost everything eventually worked, right? All this stuff. Go back to 1999, 2001, all the dot bombs. Oh, that's the dumbest. Ha, ha, ha. Pets.com. How stupid. You know, 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 of venture 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 said, hey, we're 10 years earlier?

21:58Well, that one is a little different in that that was like a politically motivated market, which is a different kind of a thing. I mean, I think so. We're big believers in software. And if there's like a massive software breakthrough that has new applications or new models or these kinds of things, and we'd certainly be on that. anything like AI or crypto or, you know, or like, you know, what's going on in games. Like, we'd bet that every time. I think climate was a little different. It wasn't software. It was material sciences, which has a different market dynamic. So it's kind of like there eventually became a small number of auto companies.

22:44there never eventually became a small number of software companies despite what Larry Ellison and all those guys said that there were only going to be three software companies and all that thing because 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 etc I know Mark is spending a bunch of time in AI right now talk about the AI strategy at how you're approaching AI in terms of is both how you think about it from an investing perspective, but also does it change things at the firm more broadly?

23:45Yeah, well, like it does change things at the firm broadly. You know, from an investing perspective, it's kind of like, oh my God, we have non-deterministic computing. Like, holy cow. You know, like 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. So from a firm perspective, I think we end up needing, okay, different expertise. We need kind of access to different networks. We need kind of different kind of help for entrepreneurs. Like it's amazing. So many of the AI entrepreneurs are actually, they're not even engineers.

24:34They're like researchers. So this is a totally different type of cat to be starting a company. And, you know, 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, like, will work, at least for a while. Yeah. And so it's kind of hard to pass on any deal in that way. So it's exciting. And that was true also of Web3 for a moment. When you think about Web3, do you think, hey, it's just in a momentary lull, partly sponsored by markets and developer activities higher than ever?

25:19I've been struck just by how far ahead AI is of Web3 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 Web3. Like, what did I, you know, was the financialization a distraction? Or I guess reflect on that a little bit. Or what's your perspective on that? Yeah, 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 finally, like, working really well. I think with crypto, it started, like, in earnest in 2008. Like, that was the 1943 moment.

25:57So it's a lot younger than AI. And like I think in fact, so and 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 3 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. but there's also kind of like a because you can create money there's a casino aspect which you know needs regulation and we've been kind of working with the U.S. 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.

26:53And that we're really on the verge of. I mean, like, I think we're going to see 100x improvement of the kind of base infrastructure in the next turn in the next year. So 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 in the hands of one person or one company.

27:51That would be horrible and dangerous. Whereas if it's open source, universities can work on it. We can understand it. It can be deployed. I often remind people the last nuclear bomb that was launched was when only we had nukes. That's a dangerous world with one person having the nukes. And now everyone has nukes or a bunch of people have nukes and we haven't had. We haven't had any nuclear activity. And there's a very, very specific reason for that because everybody's got nukes and nobody wants to get nuked. And I think that AI is, you know, to the extent that AI is a super weapon, that will also be true there.

28:27And so if you believe that, then I think what you want is open source. And I think if you want regulatory capture or monopoly for yourself, you want to shut that down. You mentioned earlier that you consider your peers as the best kind of specialist firms and you compete with those firms. Do you also see your peers or competitors, other multi-asset firms that are not even in venture? As you get bigger and bigger AUM, are there firms that you see yourself as veering into their space? It's funny because I've spent some time with both the folks at BlackRock and at Apollo just trying to understand their structure and why they're public and these kinds of things.

29:09And I would say they are culturally, philosophically, operationally the opposite of us. So they're very, very price-focused. They're optimizers. They're efficiency experts. We don't care about any of that. What we care about is, is it a real breakthrough? And how big can we help make it? Can it win the market? 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 nothing 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.

29:53Like my understanding of the SoftBank thesis was that this is a place that LP could plow a ton of capital and get some like consistent, you know, return. And there's not that many places where you could just plow all that capital into one place and get that kind of diversification. How do you think about the LP product that you're offering? We think about LPs differently. So we think about LPs, or the way we like to think about them is the same way a company would think about its VC. So we're not building a product for them. We're building a product for founders. They can invest in that product and then there's a couple of things we think about there.