a16z Podcast - a16z Podcast: Ben and Marc Explain (Practically) Everything – Part 2

Episode Date: August 26, 2014

The five-year anniversary segment with a16z founders Ben Horowitz and Marc Andreessen picks up with a discussion of Clayton Christensen's theories around disruption. Why Christensen's thinking is very much on the mark today, and how his theories help guide the firm in making decisions about what NOT to invest in. Ben offers one of the things he wished he had known as a young CEO, and Marc describes a trait that every great entrepreneur possesses. Part two of two.

Hello, I'm Michael Copeland, and this is the A16Z podcast. You're about to hear part two of the Ben and Mark Explain Practically Everything podcast. If you miss part one, find it on A16Z.com. Part two picks up with a discussion of disruption theory. Disruption theory has been in the news of late as it relates to Clayton Christensen, you know, the master of this. And I just want to ask you guys not so much about the criticism of him, but from where you sit, that theory and his thinking kind of galvanized itself into a book in 1997, you know, do you build companies differently today? Does, do those theories still hold water or what's changed? Yeah, so I think his book was actually quite brilliant. It's funny that it's coming under criticism now after he's been proving, like, completely right in the general

idea that he had. It actually reminds me of the creation. attacks on evolution where like yes from a it's like intellectualism at its worst right it's like oh here's something wrong with darwin's original theory and it's like okay now we based all of biology on it we made tremendous progress like how about that um and this is kind of like you know i don't believe in i don't believe in electricity no and you know this is kind of the kind of business version of that where you know he developed the theory um all of us in high tech And it was an amazing business book at the time because it explained a phenomenon that, you know, and now is kind of obvious, but in 1997 it was tricky, which is why does there, really,

why do there need to be new companies? Right. And what's happened when we just got through talking about, like there's an explosion of new companies, and these companies aren't trivial. They're becoming very, very important company, you know, companies like Google and Facebook and so forth. And so he's kind of been proven right. And then not only has he been proven right on kind of the large level, but the mechanics that prevent the kind of incumbents from innovating at the same rate as the new company are still completely in effect. And we use his models all the time in our thinking and our analysis.

and no doubt there are probably some minor problems with examples he's used or like the way he worded it or what have you, but like basically he was right. Yeah, I would also say two things. I'd say one is we actually use his theory basically to tell us what not to invest in. Yes, right. As well as what to invest in.

So how so? Well, so, for example, we have this basically this theory that basically is very, very dangerous. So one of the great things about our industry about venture capital is you get to do these things that basically disrupt sort of the big established incumbent companies. Conversely, a very dangerous thing to do is to attack companies that our internal term is the new incumbents. And so it's one thing to like go attack, you know,

a tech company that's been in business for 50 years that's on its sixth CEO or something like that. It's another thing to go attack Google being run by Larry Page. Right. Because Google being, you know, Larry Page is like fully aware of the theory of disruption and in full command of his company. And if like he sees a disruptive threat coming, he is quite capable of doing the things to head it off that a, you know, fourth generation professional CEO might not be able to do. So, So anyway, so that was one thing I want to say. The other thing I want to say is disruption, it's, I agree with Ben, it's funny that this is a topic now, but since it is it's worth talking about, which is the term disruption, by its very nature,

the term itself has negative connotations, right? Its disruption seems like it's one step away from destruction. And so it gets, it's got this kind of, you're getting this kind of popular kind of conception that there's something bad about it. The actual way that Christensen used the term was actually in a very sort of applied way in a very specific circumstance in business. And actually in a very positive way, which is basically he described it as a way that progress happens.

So progress doesn't happen by basically old companies like deciding to do new things. Progress happens because new companies decided to do new things. And then disruption is the process by which the new things are able to take over from the old things. If you decide you don't like disruption, what you're basically saying is you don't like new things, right? It's basically to be against disruption

is to basically be pro the status quo. And pro the status quo means however the world is to, like that's it like that's all we're going to have like the way things work today this is as good as it's ever going to get the disruption argument is no no no no no things can become much better products can become much better businesses can become much better opportunities for people can become much better and so it's a it's a negatively connotated term that has very positive implications and I think that that's really at least in the last couple of years that's been

lost in a lot of the commentary you mentioned Google and and one of the things that we've seen you know through the technology industry's history is that it's very very hard to disrupt yourself and kind of of make a transition from one thing to another. IBM, maybe the only company that's done it. Google, you know, they're trying everything, you know, and Facebook is trying everything. And do these companies somehow change the rules, or is it the same rules applying and, you know, disruption theory catches up with them in 50 years, maybe?

So I think you're, I think we kind of have to break that back apart and go back to what Mark said. I think that people often think of big companies can't innovate, little companies can, but the real truth is new companies can innovate and companies that are so old that the original inventors are gone have a lot of trouble doing it. And so if you go back to HP or IBM or any of these companies

when the founder, when Thomas Watson was running the company, when Dave Packard was running the company, they didn't have any trouble doing new things. And they did it phenomenal. I mean, HP in particular did like a crazy number of new things. It's just amazing and in retrospect, really phenomenal. And if Mark Zuckerberg's running the company or Larry Page is running the company, you know, that's not an old company, that's a new company.

And as innovators, we believe, and this gets back to why we don't attack them because they'll attack right back and very effectively, you know, they're going to be able to do new things. And like sometimes that will mean bringing in new talent through acquisition or new technologies through acquisition, but they're going to be able to think about the problem through a lens that is not the business they're in. And that's kind of, this is the amazing thing

that Clayton Christians and laid out was that, you know, if you're, look, if you're an old company run by professional managers, you're really good at studying and optimizing the business you're in. And so if there's a new business that comes along that doesn't, is inconsistent with that, you get stuck. but if you're Mark Zuckerberg who created a business from nothing then you have a very different view of the world

and it's not like okay how do I optimize the business that I'm in it's like well how do I get another business that's like Facebook that's more of the way you think about it the other thing is the fact that Christensen was able articulate this in a theory that's so clear and put in the book is I think that the best professional CEOs in the tech industry today

now understand this in a way that maybe their predecessors 10 or 20 years ago didn't understand it so I'll just give you two examples of people I work with John Donahoe at eBay, like when mobile came along, you know, sort of classical professional CEOs when mobile comes along, you know, would look at it and say, well, I've got this great business on the web. If I move to mobile, it may or may not work as well. And so maybe I don't want to try to make the move.

Maybe I want to stay on the web and reinforce the web and, like, not take the risk of, quote, disrupting myself by making the jump to mobile. But since John understands disruption theory, and it's been like articulated and explained in a way that makes sense, you know, he was able to be based on a phenomenally successful job. He went full throttle into mobile. And they made the jump. and they've done it very well. Meg Whitman doing the same thing with this,

one example is this Project Moonshot, which is these cartridge-based servers. At HP, right. At HP, that are a direct attack on the existing Blade server business. And the Blade server business at HP is a very, very big and profitable business. And HP is basically self-disrupting

with this new kind of cartridge-based server. And so, again, and when you have the discussion, in HP board meeting, and you have the discussion, you're like, okay, why are we taking the risk of damaging this big existing profitable business by doing this new thing? The answer is, because it's the right thing to do according to disruption theory.

Like it is, like there is a logical framework. And again, think about what's happening, which is something new is happening. Progress is happening, right? This is now the reason and the motivation and the explanation and the justification to be able to make progress. So it's an incredibly powerful, positive thing. Let's get to entrepreneurs and entrepreneurship. You guys founded the firm, in part, I've been told, because you wished you'd been told

or helped in certain ways. what's one thing both of you wish you knew or someone had told you as entrepreneurs? Well, that presumes we would have listened. You know, there's just so much that we did not know going through it the first time. And, you know, one of the great things about the entrepreneurial experience is it's just an amazing learning curve about everything from, you know, markets to organizational structures, to compensation, to everything. to everything. But, you know, probably one of the most challenging things to learn while you're out there is kind of how macroeconomics impact markets and particularly how they, how private funding

can change very, very rapidly. You know, when we were, you know, particularly, and this wasn't as a harsh, and at Netscape, but at OpsWare and LoudCloud, it was like incredibly difficult for us to go from a funding environment where basically had the highest multiples in the history of anything to there was no money available, period. I mean, like that was, it was the most dramatic fall imaginable from the highest of highest to the lowest of lows.

And, you know, to have the NASDAQ fall over 80% and that not being, you know, that's NASDAQ, that's not tech. 95% it's just like not something you could even imagine or get your head around so I wish you know like I wish we would have known that I wish I don't know if we would have believed anybody if they had told us that but that would have probably made it a little less painful if we had any idea how bad it could be it would have made a worse book I'll tell you that that you wrote but still yeah um on the other side of the table what do you want more or less from entrepreneurs, more of or less

of from entrepreneurs? Yeah, well, you know, it's very different across different businesses. But like the one thing that would probably be nice if there was less of that's pretty consistent is it'd be nice if it wasn't so important

to entrepreneurs what their peers' valuations were. Yeah. Like that, that is probably the most meaningless thing to focus your mind on as an entrepreneur imaginable it's just like irrelevant you don't have anything else to base your value on do you no no that's you do you do yeah so it's not actually you know your company is your company their company is their company you're

looking at the price they got not any of the business metrics that they have or like how the company is going so you're not actually basing your valuation on anything in that sense And there's better data to be gotten for sure. Like, you know, we have better data. We can talk to them about all the kind of valuations based on actual revenue and so forth, as opposed to the person they went to school with or the person they worked at their last company with. Right. And, but people get very wrapped around the axle on that because there's, you know,

it's kind of the thing that Peter Thiel talks about, whereas competition's actually, like, really destructive. And that's, like, the worst kind of competition because it's competition that's irrelevant to anything in life other than, you know, you can go tell your friend what valuation you got. And I think that it causes bad, you know, errors in judgment and delays and decisions that need to be made quickly and things like that. So, you know, it's just, it's one of those things where humanity gets the better of you. And I wouldn't like that. Yeah, less of that would be good. Mark, any anything you would offer on that? Well, the thing that the great entrepreneurs all have in common we talk about this a lot but you just see it every day is the great entrepreneurs all have

amazing courage and so I would say we're blessed in that the onto a lot the entrepreneurs we work and we select for it I mean we try very hard to select for it but the entrepreneurs we work with that are amazing one of the things they all have in common is they're incredibly courageous by which I mean they don't give up they don't they don't quit like they don't quit they don't flinch they don't get demoralized they don't I mean well actually they may get demoralized or depressed but they show up to work the next day and they work their way out of whatever problem they're in and they just keep pounding and pounding and pounding and pounding. And I think there's a little bit too much in the valley right now of the pivot and the lean startup and the, you know, the everything's an experiment

and minimum viable product and failure is good and kind of all these excuses to be able to give up when things aren't going well. And I think that the great entrepreneurs through history have always been the opposite kind of personality and all that. They've always been, I'm going to make this thing work hell or high water no matter what. I am going to knock my way, you know, head first through any you know, barrier that I run into. I don't care what people say about me. I don't care what kinds of problems I have. I'm going to figure this out, and I'm not going to give up.

And so I would just say, we love working with people who have that personality type. And you can never have enough of them. Elon Musk comes to mind. I mean, cars and space. Yeah. So to start, think about this, to start a new electric car company. And by the way, think about the last car company starting the United States. They literally made a movie about the catastrophe that resulted, which is this movie, Tucker.

And so if you want, like, a story of like a horrible business. Which went better than DeLorean. Yes. Well, actually, yeah, Delorian. Well, he had the added, he had the cocaine smuggling business on the side, which helped cover the, defray the expenses. But, you know, car companies, like all the car companies in the U.S. that are successful are, like, you know, from the 19-10, 19-20s. And so to start a new car company in the electric car category, when all the electric cars had failed,

simultaneously to start the first new private rocketry company in the United States in probably 40 years, to go straight up against the big boys, to do those at the same time and then to go through the 2008 crash. And he has actually recently opened up on this of like he almost lost both companies in 2008. Like they've almost both vaporized. And then it got through both of those and have both come out the other side, like just gigantic screaming successes. It's just a spectacular performance. And a huge part of it is he didn't give up. Ben, let's touch on your book a little bit, the hard thing about hard things.

One thing, it got great reception, but you're like, well, yeah, that sounds good for you, Ben. But that was your story. How can I embrace that and make that my story? but, you know, are there, was there anything in the response that you wish people had pushed you harder on? Well, the things that people pushed me on actually annoyed me, so it's hard to say that I wish about that. I mean, I think that to your point, though, it was my story, and the reason for that, I mean, there was a really specific reason for that, which is building these companies tends to be very dynamic and very situational. and so a very frustrating thing about management advice in general and particularly both in books

and then things that you often get from board members or kind of pattern matches as it were is that they're giving you advice and it's based on something and that advice and what it's based on may or may not be relevant to you and if you don't know what it is it's very difficult to interpret it and I always found that management books would give like guidance and you'd be like, well, okay, is that what I should be doing? But I have no idea where it came from, and so it's hard to say.

So a lot of putting my story in was just to say, look, this is why I'm telling you this. And if your situation is completely different than this, then that might be the part of the book that you ignore. Or like at least, or maybe you can map it on to what you're doing. But I think that without knowing why somebody is telling you something, it's pretty difficult to get value out of it. And on the topic of the entrepreneurial journey, we have to go see a pitch. All right, that's what you guys are getting paid to do.

So Ben and Mark, thanks so much. We will do this. Well, it won't do it in five years. We'll do it much sooner than that. Thank you very much. Thanks, Michael. Thanks, Michael.