a16z Podcast - a16z Podcast: Beyond Disruption Theory

Episode Date: July 4, 2019

with Marc Andreessen (@pmarca), Ben Horowitz (@bhorowitz), and Michael Copeland Continuing our 10-year anniversary series since the founding of Andreessen Horowitz (aka "a16z"), we’re resurfacing some of our previous episodes featuring Andreessen Horowitz founders Marc Andreessen and Ben Horowitz. This episode was actually recorded in 2014, on the 5-year anniversary of the firm, and features Michael Copeland interviewing Ben and Marc about disruption theory, as well as key traits of entrepreneurs. You can find other episodes in this series at a16z.com/10.

The content here is for informational purposes only, should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, everyone. Welcome to the A6 and Z podcast. I'm Sonal. So this week, to continue our tenure anniversary series since the founding of A6 and Z, we're actually resurfacing some of our previous episodes featuring founders Mark Andreessen and Ben Horwitz. If you haven't heard our latest episode with Stuart Butterfield turning the tables as the entrepreneur interviewing them, please do

check that out and other episodes in this series that we've been running all week on our website at a6.z.com slash 10. But this episode was actually recorded in 2014 on the five-year anniversary of the firm and features Michael Copeland interviewing Ben and Mark about disruption theory as well as key traits of entrepreneurs. Disruption theory has been in the news. I 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 creationist 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've based all of biology on it. We've made tremendous progress. Like, how about that?

And this is kind of like, you know, I don't believe in it. I don't believe in electricity, you know. And, you know, this is kind of the kind of business version of that where, you know, he developed the theory, 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? And what's happened when we just got through talking about, like there's an explosion of new companies. 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, you know, 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 we, 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 at 6 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 thing. things to head it off that a fourth generation professional CEO might not be able to do. So anyway, so that was one thing I want to say. The other thing I want to say is disruption, 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 sitting 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, right? So progress doesn't happen by basically old companies like deciding to do new things.

Progress happens because new companies decided to 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. Right. And pro the status quo means the way, however the world is today, 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 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 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 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, 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, they, you know, we believe,

and this gets back to why we don't attack them because they'll attack right back. 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 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 the way you think about it. The other thing is the fact that Christensen was able to articulate this in a theory that's so clear and put in the book is, I think that, like, the best professional CEOs in the tech industry today, like, 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 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, just one example is this Project Moonshot, which is these cartridge-based servers 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, you know, 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 experiences, it's just an amazing learning curve about everything from, you know, markets to organizational structures, to compensation 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 lesson 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 just, 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, tech fell 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. Yeah. 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, no, that's... 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.

But people get very wrapped around the axle on that because it's kind of the thing that Peter Thiel talks about, whereas competition is actually 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 can go tell your friend what valuation you got. And I think that it causes bad 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, 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 entrepreneur 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. They don't, they don't quit. They don't flinch. They don't get demoralized. They don't get, 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 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 head first through any 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 started in 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, DeLorean. 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 19-10s and 1920s. And so to start a new car company in the electric car category, I went 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 to gut through both of those and have both come out the other side like just gigantic screaming successes is 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, 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's 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 and advice in general, and particularly, you know, both in books and then things that you often get from board members

or kind of pattern matchers, 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, you know, 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, like, 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.