a16z Podcast - a16z Podcast: Ben and Marc Explain (Practically) Everything – Part 1

Episode Date: August 25, 2014

Around the firm we use “software eats the world” as a guide for how technology will impact every industry and every person – from education to healthcare and government. As a16z marks its five-year anniversary, we turned to the fellow who came up with the thesis, Marc Andreessen, to explain how it’s rippling around the globe. And to break down all the implications for building companies and managing people we tapped a16z's cofounder Ben Horowitz. With both “a” and “z” in the room, this segment takes stock of the technology industry and startup ecosystem – from entrepreneurs to investors, and where it’s all headed next. Part one of two.

Welcome to the A16Z podcast. I'm Michael Copeland, and we have with us today both A and Z, Mark Andreessen and Ben Horowitz. Welcome, guys. Hey. All right. Thank you, Michael. So right about now, it's been five years since the firm was founded, since you guys founded the firm. And we thought it was a good time, not to look back, but to sort of take stock and talk about some tech trends that you're seeing now and then spin things forward. So one of the pillars that this firm really rests itself on is software eats the world. And Mark, just to refresh us, we sort of use it as shorthand around here, but what is the thesis? Explain a little bit, and then let's get into where we are in that thesis. Yeah, so the thesis is that, you know, the computer itself is only about 75 years old, right?

The computer was originally invented to crack codes during World War II and then, you know, got adopted by government. governments and big businesses in the 60s and 70s, and then the PC arrived, and then sort of, you know, rich people and then developed world. U.S., Europe were able to get PCs in the 80s and 90s. You know, leading up to basically about five years ago, you lived in a world in which maybe a billion, billion and a half people had PCs. And then some of those PCs were on the Internet, and then at some point all those PCs finally got on the Internet. And that's all fine and good. But it sort of meant that most people in the world didn't have access to computers, and most of the people in the world weren't on the Internet up until the future. years ago. And then, you know, starting in 2007 with the iPhone, the smartphone comes out,

and the smartphone finally packages computers in a form where everybody in the planet can have one. And this is the thing I've been talking a lot about that people occasionally get angry about because they think it won't possibly come true, but I'm convinced it's going to come true, which is I think everybody in the planet by the end of the decade is going to have a smartphone, effectively everybody, almost everybody, including in places where it's still hard to get electricity or water. People are going to have smartphones. In fact, the big thing this year is the rise of the $35 smartphone in countries like India and Pakistan that are just exploding in just giant volume.

So I think we're going to live in a world by the end of the decade in which there's five, six, seven billion smartphones in people's hands, which means five, six, seven billion people in the world connected to the Internet with kind of what we would consider modern tools and technologies and access. And so that's a world we've never lived in. That's a world where everybody's connected. That's a world where everybody has access to the kind of technology that we take for granted today.

And so in that world, you can start to think, I think, you can think sort of very profound thoughts about, like, okay, so what happens in many different fields in businesses and industries as a consequence of that. So what happens in the media business is an example when everybody has the ability to consume, you know, news online. What happens in the, you know, TV business, when everybody has the ability to get video stream straight to their cell phone? What happens to retail when everybody can engage in e-commerce? What happens to education when everybody can take classes online? online through their smartphone. And so I think it's basically, you know, now the next five years is basically prime time to think about every business, every industry, every field, and say, well, how can we reinvent

it now knowing that basically software can basically play such an important role in everything. So where are we? And what are you guys seeing in terms of the verticals that are being eaten? And then I want to get at what it's like to be eaten too. But what are the verticals that sort of fallen is the wrong word, but fell first to software eats the world and what comes next? Well, I think it's building. I would characterize it as building where we tend to be glass half-full people,

and we think there's huge opportunities that kind of flow from this. So, you know, media has been an obvious one. Financial Services, software's, you know, taking over at a very fast pace, and then retail e-commerce, you know, has been a profound revolution over the last 10 years, and that will continue. I think the three big ones that we think a lot about for the next, you know, five or ten years are, and they're really, really big, you know, domains. And so these are long-term projects, but health care education and then ultimately government.

So those three that you mentioned have been the most intractable, it seems, and we've been promised there's, you know, electronic medical records, you know, Obama's got a great website, but that's not software-eating government. Like, why now and what makes it different? Well, why now? Because you can, because it's possible, because it can be done, because everybody's going have a smartphone because everybody's going to have to be online. These are very, very big fields, very big entrenched interests, lots of regulation. Like there's nothing easy about it. But because they're so big also makes them so important. So I'll just give you my perspective, which is healthcare and education, like, one of the things you always look at is you're like, well,

health care and education is something that you want everybody in the planet to have access to. But at the same time, if you try to do that with sort of conventional ways of delivering those services, you'll bankrupt everything, right? You look at the U.S. fiscal situation over the next 50 years and you look at this massive debt on a very large amount it is geared towards health care paying for people's health care and a lot of it then is geared towards education and this huge crisis we have around things like student loan debt and so software or health care and education suffer from something the economists call Bommel's cost disease after an economist named Bommel and the cost disease basically is technology steadily drives down prices in sectors

like media and in financial services but technology is not yet driving down costs in health care and education, but it should. And so if you can bring revolutionary technology into those fields, you could basically break the back of this so-called cost disease, and then you can bring the same kind of cost reduction you see in other fields into those fields, which then means you can really open up access. And that's the critical thing, is we need to get every kid on the planet access to what we consider today to be a top-end Ivy League education.

We need to get every person in the planet to have access to what we would consider to be a modern health care capability. The only way to do that is to apply technology. Otherwise, you bankrupt the planet trying to do. do it with the current techniques. Ben, I want to bring you into the conversation. Software eats the world. It's great if you're sort of on the side of the coding keyboard where you're out there and you feel empowered to go after health care or government,

government or whatever else it is. But what if you are on the other side and you're sort of being eaten? How do you sort of view that and then how do we bring those folks along? Well, I think in the first place, a kind of misunderstanding. understanding of it is that those jobs get eaten in there are just fewer jobs. So I think kind of the history of the country and the history of the world has been the jobs 50 years from now are not going to be the same jobs that we're doing today, although we had a very long time when most of the jobs were farming. And thankfully, most of the jobs are no longer farming because that farming

is hard work. Yes. But, you know, most of the jobs today aren't jobs that were around before. I mean, there were all kinds of jobs, like, for example, delivering ice was. a big job. Making vinyl records used to be an important job. There were a lot of jobs that are no longer here. So the challenge isn't kind of the absolute number of jobs, but rather the transition from one kind of, you know, one set of jobs to another. And this is where I think I would just come, you know, add to what Mark is saying that, like it's really important to apply technology to bring down the cost of things so that you can make policy decisions to create a kind of both safety net and education system

that enables people to not like starve to death or hit the streets or become homeless or really lose their dignity in the meanwhile, but then also be in position where they can go be productive again as quickly as possible. And that kind of thing is not really affordable if all the money is going to technology unenabled education and health care

and so they kind of go together I think that if software doesn't eat the things that the government pays for then we run into trouble and you could imagine you know completely government funded awesome education enabled by things like

Oculus where you could put kids from anywhere in the very best classrooms in the world as though they were actually there. And Oculus to be clear virtual reality goggles that allow you would allow you to do what? Well, basically, enter a virtual classroom with virtual other kids and virtual teacher, which, you know, might not sound that great if you're at Harvard,

but it sounds awfully good if you're in an inner city school that's very dangerous to go to with teachers that may be no longer that interested in teaching for all kinds of reasons. And so by applying technology to the things that cost most, you can both improve the services and reduce the cost a lot, which also frees up money for things like a really robust social safety net, which basically gets you, and you ought to be in 2014, we ought to be at the point where everybody can get kind of basic shelter, transportation, education, and other services without bankrupting the country.

Does that social safety net come from private industry via taxes? I mean, is it government run? Who pays for it? Yes, I think the social safety net ideally would be, would the money would come from the government and would come from taxes, and I think it would be smart, you know, as a taxpayer, I'd say smart to do that. But it only works if there's real technology behind it, because otherwise, right now we can't even afford kind of health care. And so without the application of technology, we're in this kind of halfway point where software is eating lots of. of jobs or transitioning lots of jobs, but yet the big government services have not yet been transformed.

I see. We talk about this transition point, Mark, you mentioned billions of cell phones in people's hands soon, or smartphones, I should say, computers essentially in people's hands. What is our evidence that we're at this transition point in? I want to talk a little bit kind of about accelerating innovation and kind of in your careers, how now looks different than maybe it did. in the mid, late 90s, or early 2000s even? Yeah, I mean, well, things look really, really different.

So there's sort of this kind of running, you know, sort of this running thing in the valley that, like, it's another bubble. And people have been kind of calling another bubble now. This is year 10 of people calling a new bubble. It started in 2005. So maybe at some point they'll be right. But sort of this thing of like, is this the 90s all over again? The thing that has changed so much is the industry.

The industry in the world are so much further along, and they were in the 90s. And so we built Netscape, the company. We were at in the 90s. We built Netscape. had at one point over 90%, you know, market share for all people in the internet using our browser. And it turned out there were 50 million people on the internet. Like 50 million people around the world were on the internet. By the way, 25 million of them were on AOL. And so to say

that they were on the internet would be a slightly generous statement. The other 25 million were directly online. But that was it. You could have 90% market share and you'd have less than 50 million users. And that was it. And that was all that we could do. And by the way, those 50 million people were all coming in for the most part over dial-up. And so they're coming very slow. They were on, you know, these, I mean, they were on PCs that today, if you saw these PCs in a show, like, they're now making TV shows, like, halt and catch fire. They're making now TV shows in which, like, the period in which you had, like, these old PCs, like, was, like, they now look retro. Like, it's, like,

times have changed in a freaking hurry. And so the world was just a, the technology world was a much smaller place, and the number of people who had access to technology was just a much smaller place. Fast forward to today, you know, more than two billion people online, rising very fast. So, you know, market expansion, we think about things in terms of market sizes, market expansion on the order of 40, 50, 60 fold over the course of 15 years, which is just absolutely amazing, which is why you have these companies like Google and Facebook now that have more than a billion users. Like, I like to, I work with, you know, I work with Mark Zuckerberg at Facebook, and I like to tease him of, like, what a special position Facebook is in because

how, you know, Facebook passed a billion users, you know, I don't know, a year or two ago, and it's like, well, how many businesses or human organizations or institutions in history have ever had a billion anything. And it's like you're basically, it's basically the Catholic Church and the Coca-Cola company. And that's basically about it. And then like Google and Facebook are like number two and three, you know, three and four. And then like WhatsApp is going to do it. And then there's going to be a whole bunch of others. And iPhone is going to do it and Android is going to do it. And so the world has really opened up and expanded very fast. We invest in all kinds of things here, software based mostly, but drones, Bitcoin, 3D,

you know, virtual reality Oculus. How do you guys keep up? If, you know, of things are different and the pace is different. How do you guys personally keep up? And then how should the rest of us think about keeping up if even that's the right thing to think about? Well, I think it's like a lot of things that are extremely complex. If you don't have some kind of unification understanding of what's going on, then it does get very complicated.

But one of the things, one of the tenants when we started the firm was we were only going to invest in things that we understood, and that meant things that where software was a core intellectual property. And if you look at what's happening across all of those things, there are different manifestations of software becoming a more powerful force in the world due to all the things that Mark talked about the improvement in the underlying platforms,

the improvement in the programming languages, and the connectivity and all these things, things. And so whether it's software eating money or software eating entertainment, it's all kind of comes from the core root phenomenon. And so these things are relatively easy to understand quickly. Now, some of them, you know, the details of every one of them is complex. But, you know, it is the nice thing is it's our favorite thing to do in the world. So like it's a great job in that way. We've talked about sort of software eating, what one could imagine our sort of mostly software-based or digital-based industries, it's moving into the physical world.

Where do you see that most starkly? And does it look different as software eats, you know, manufacturing robotics, et cetera? Yeah. So, yes. So basically, I think the key assumption I make is basically every physical thing is going to become smart over the next, you know, 10 or 20 years. This one's going to take time, but it will happen. So basically every physical thing, whether it's a toy or a light bulb or a doorknob or, like, you know, a building or, you know, your desk or whatever. You know, take your pick at your car. They're all going to become smart. And by smart, I mean, they're all going to have chips built into them.

And then they're all, everything is going to have a chip in it. Everything is going to be on the Internet. Everything's going to be connected. Everything is going to have data. Everything is going to be responsive, you know, to human beings. And by the way, I mean, like, everything. Like one of the most, the very exciting trend that we're not yet invested in, but I'm very excited about is, like, I think, I'm convinced in the future pills are all going to have chips. in them. So, for example, like, every pill you take is going to have a biodegradable chip in it.

But, like, we've been talking about smart refrigerators for a long time. Why do I want my refrigerator to be smart? Because you want your refrigerator to know, for example, when the food in it has spoiled so that you don't get, like, salmonella. Like, you know, very fundamental. Like, you might like to know, you might like to know, you might like to know you're at the grocery store. You might like to know, like what you've actually got, like what you actually need to reorder. And it's just been, you know, the nature, the criticism of this stuff is always so interesting because basically, you know, these products come out and they're basically experiments. And so people basically try different kinds of things. And, you know, some of them work

and some of them don't. And then there's always this kind of criticism of like, oh, the designers of these products, like, didn't think everything through, as if there's some, like, magic process where you can send a bunch of geniuses off to a, like, remote island and they could, like, design everything perfectly and then build it right the first time. But, like, that never happens. What ends up happening are tons and tons and tons and tons of experiments, right, out of which you finally then get the things that are going to go broad. And so people experimented with how to bring computers to consumers for 10 years before, you know, the IBM PC went broad. People experimented, you know, smartphones, the smartphone concept is not new. It goes back to

1997. It took 10 years to get, you know, to the iPhone, to the actual product people want. The internet, the internet was in existence for 30 years before we made the web browser and finally figured out how to make the internet accessible to everybody. So, so that's why I say this part of it is sort of internet of things concept or kind of making the real world smart is a long-term thing. It doesn't just instantaneously happen. But it will happen. And it will happen through the kind of process of experimentation that we see happening right now. Let's switch gears a little bit. You guys started the firm now five years ago.

In the teeth of the worst recession, since the Depression, is that fair to say? Well, it was the worst economic crisis for venture capital in 40 years is what everybody told us. Yeah, that's what they said. So it seemed like a good idea at the time, and it turns out it was. But the venture capital industry has been shrinking, you know, ever since. So describe for us where we are in the VC industry. And then I want to get at how building companies and venture capital relate to each other today and as you see it going forward.

Yes. So the shrinking in the number of the firms has really been a wonderful thing and very healthy for both the industry and very good for entrepreneurs. So one of the aspects of venture capital that bothered us, a great deal when we started the firm was that it was an industry that really was in the dark and what I mean by in the dark it was

completely invisible to kind of what was going on what was behind these firms and so forth and like anything that's in the dark it tends you know that's where like the nasty business happens in terms of you know things everything from you know kind of

bad things growing in it to ethics and everything whereas things in the sunlight that's when everybody behaves and is at their best. And I mean, it was just the nature of how it evolved and so forth. And it kind of stayed, it was a kind of shadowy, a relatively shadowy industry. And as a result, it was very difficult for an entrepreneur to figure out what was what, you know, at a very basic level. And so there were like these phenomenal firms like Sequoia or Benchmark or Greylock, but for an entrepreneur to really understand the nuances between the ones that were really great

to work with or just people who like simply had money and had no idea how a startup should get built was really impossible to tell. And I think, you know, one of the kind of contributions that we made was just the way we went about things, you know, partly because it was counter programming is we put a lot of light on it. And that also combined with what was going on with social networking and was going on with the internet and going on with a real entrepreneurial community kind of made entrepreneurs really aware of what they should expect and what they should want from a venture capital firm. And, you know, most venture capital firms, as you would expect, just didn't stand that test. Then at the same time, a kind of new tier of venture capital emerged angel investing

or seed investing. And this enabled for the experimental things where you really just needed capital and maybe a little bit of advice, there was a whole new kind of functionality at that layer. So you kind of had the landscape bifurcate into seed investing where you need a little money and a little help. Or venture capital investing where you need a lot of money and a lot of help. And the whole kind of middle, like we don't know how to help and we don't have that much money like that big set of hundreds of venture capital firms became no longer interesting. And so the result of the landscape, I think, is it's way better time to be an entrepreneur now raising money than it's ever been before. it's easier to raise money in small amounts and then if you raise money in large amounts

you get likely a much better investor than you would have gotten in the past we're seeing large rounds raised but I want to have you guys answer the question of you know why do if I can myself and three of my friends and virtually no money and just a credit card and Amazon Web Services

if I can build a company and start on my way why do I need though then traditional venture capital, even at the high end, like that big money. Why is that still necessary? Cheaper to start, more expensive to grow. So it goes back to what we were talking about before. So the market sizes are much larger. So the prize is bigger. The market is larger and it takes more money to be able to build a company to the market. And so, yeah, you can start a lot of these companies with, you know, with three laptops and, you know, three lattes a day and you're

off to the races. Three kids, you know, living in ramen noodles. But at some point, you need to build the company, and you need to build the company that is then going to go take the market, and the market is big, and the market is global, and you're going to need a company around that. You're going to need a sales force. You're going to need marketing. You're going to need a big development organization. You're going to need customer service, customer support. You're going to have a big recruiting campaign. You're going to need partnerships. You're going to need expansion capital. All these things kick in. And so these companies almost never, I mean, almost never stay small. It's extremely rare that you see any kind of company that does anything big in tech that

doesn't end up, number one, raising money, and then number two, if you're going to raise money, raising money from venture capital. You mentioned global, and I understand global markets. Venture capital has done very poorly as a global, you know, enterprise. Is that going to change? Do you see that changing at all? Well, I think it will change, but not in the way a lot of people are expecting. And to some extent, it is changing already in the sense that some really large companies are

coming out of China right now, like really big. Alibaba is a monster in a good way. So it will change. I think that people expect, kind of sort of expected that, oh, well, if we just focus on building software companies like Silicon Valley, we can be like Silicon Valley. And that's been largely a mistake in that you can apply policy and tax breaks and even have a good university. But Silicon Valley is a network effect. And if you're competing with a Silicon Valley company without the level of engineering talent, without the level of executive talent, it's still rather hard. Mark had a really good, I can't remember, I think it was a series of tweets rather than a post, but a really good series of tweets, which just said, look, there should be 50 Silicon Valley's not one.

Or actually, that was an article. 50 Silicon Valley is not one, but they should not be Silicon Valley. they should be things that are doing other areas of technology, other areas of innovation, and some of that can be facilitated rather than kind of tax-free zones, more like regulatory-free zones, where things that are very difficult to build here can be built elsewhere. And the world will certainly be a better place if there are, you know, lots of new companies coming from lots of places all over the globe. And I think that Silicon Valley is such a great example of what's possible that that's going to,

happen. Do you, I mean, do you see evidence already, Mark, of those kind of zones and Silicon valleys, as it were? Yeah, so there's two kind of ways to come at it. One is on the zone side. So there is actually a long history of this sort of concept of a special economic zone. And actually countries like Hong Kong, you know, at one point. And actually China is a very aggressive user of special economic zones. Actually, also the prime minister of Japan, Abbe, is now proposing special economic zones in Japan to be able to restart growth. And so, you know, you certainly have like a long history with that kind of approach. and then you have examples today where that kind of thing is playing out.

And so one very interesting example is South Korea has sort of famously been much more liberal in terms of legalizing new stem cell-based health projects. And, you know, which stem cell research for regenerative medicine looks incredibly exciting. It looks like we might be able to grow new organs and do all kinds of things. That research has historically been difficult to do in the U.S. for regulatory reasons. And so you see more examples of that. But I'll tell you the other thing you see is just an explosion of entrepreneurial energy and enthusiasm all over the world. You just see, and you know, we see it all over the place.

You see it all throughout the U.S. in like 20 cities in the U.S. now. You see it, and then you see it all over the world. The most vivid example is a good friend of mine, Chris Schroeder, wrote an entire book over the last three years called Startups Rising, which is a story of high-tech entrepreneurship in the Middle East. And he basically traveled all through, you know, Jordan and Syria and Egypt and all these countries, going through all these dramatic changes. And in every single country, he found high-tech entrepreneurship. entrepreneurs and startups, you know, building unbelievable new companies and products.

And most significantly, he actually just got one of those, like 15 visas a year for business travelers to Iran. And so he just went to Iran after he wrote the book, and he just came back. And it turns out in Tehran, there's a thriving sort of underground high-tech startup scene. And there's all these entrepreneurs that want to start all these online businesses. And if you want to meet, you know, a 22-year-old who's incredibly frustrated by the fact that his entire country has been embargoed, it is in the Tehran high-tech scene. And so even in countries where you were sort of the most concerned from a geopolitical standpoint, there's enormous energy and often youth energy towards building these kinds of businesses.

And as a firm, do you need to tap into that directly or indirectly? Or is there a – how do you plan on that going forward if you do at all? Yeah, so one thing about investing is it's important to keep in mind that you don't want to try to do every opportunity. You know, every firm doesn't have to be in every deal. and if you try to unlike kind of running like say an enterprise software company where you absolutely do want to have get every customer in investing you want to stick to the things that you're best suited to do where you're the very best firm possible and for us you know that's primarily software based things and primarily Silicon Valley just because this is what we know we understand the culture we understand the technology and you know look different cultures are different. The world, the world may be getting flatter, but it's certainly not flat in terms of culture and in terms of motivation in terms of what stock options mean and the difference between beer drinking countries and wine drinking countries. And you have to know all these things to invest

effectively globally. So it's not, you know, we can have a very good business investing in Silicon Valley. And then, you know, whether we expand that or where we expand that, I think is TBD, but it's not critical for survival in the way it would be if we were, say, a software company. The thing I'd say is a lot of our companies actually bear directly on this, right? And so companies like Facebook and Twitter as platforms for global communication. You know, entrepreneurs are communicating on Facebook and Twitter every single day in incredibly beneficial ways. Or, you know, another example is a startup that we've seed funding called teleport that's making it, you know, much easier for engineers to consider relocating, like where to locate a new company

or how to get talent to be able to move to a new location. And so, or, you know, for that matter, Airbnb, which makes it, or, you know, lift, which make it much easier for people to travel and be able to, you know, temporarily live in other places as they kind of, you know, go around to where the different opportunities are. And so we view our, one of the things we view ourselves is doing is funding the platform companies that are kind of building this world in which there's going to be a lot more entrepreneurship. That's part one of the Ben and Mark podcast. Check out part two where the discussion enters the realm of disruption theory and how that helps the firm decide what not to invest in. as well as how large companies innovate and what Ben and Mark wish they had been told as young entrepreneurs and more.