a16z Podcast - a16z Podcast: Disruption in Business... and Life

Episode Date: March 2, 2016

It's not incompetence, but competence, that causes companies to be disrupted. That applies to big companies and small, as well as people too. Or so argue Clayton Christensen and Marc Andreessen in this podcast, based on a conversation at Startup Grind (moderated by Derek Anderson) between the a16z co-founder and Harvard Business School professor Christensen -- aka the "father of disruption theory" (also known to his wife as "the Jewish mother of business"). This podcast shares everything from their views on managing innovation in companies like Apple, Google, and Twitter (including how to apply the jobs-to-be-done framework there); what the abundance of capital means for innovation; and how to truly measure success and strike work-life balance.

Hi everyone, welcome to the A6 and Z podcast. I'm Sonal. And today's podcast is based on a conversation between Mark Andreessen and Clayton Christensen, who is the father of disruption theory. It took place at Startup Grind in San Francisco recently, moderated by Derek Anderson. And here's the conversation. How has your theory on disruption evolved in the last 20 years since you released it? Almost none of the critical ideas that now are really important existed in. in the original theory. But I think what we've learned is that a good theory has to be able to confront and resolve anomalies.

I have a sign outside of my office that says anomalies want it. Because if somebody can bring to you something that's going on that the theory can't explain, then you either have to put a boundary and say the theory doesn't apply to that, or no, there's something else going on, and change the way we define things. And so things that are really important are, there are some industries like hotels

where disruption never happened. And historically, higher education was never been disrupted. And then we realized that the trajectory of improvement in the theory is not a constant, but the rate at which innovators make good products better is a variable. And so hotels have been disrupted now because Airbnb has changed the business model. And online learning is improving at such a rapid rate that Harvard Business School is getting

disrupted. And that was unconceivable a generation ago. Why does the theory, Mark, still have so much power with entrepreneurs and VCs in Silicon Valley 20 years later? There are people that say, hey, it's not relevant anymore. And how do people here think about it? Yeah, so the way I think about it is we had algebra of business, and I described algebra of business was kind of a very straightforward theory,

and this was the case when I came to the Valley, this is kind of what all the experts would tell you, is that basically if big companies are well-run, then startups can't take them out. And so you want to be very scared and wary of the companies that are well-run, and you basically, as an entrepreneur, you need to wait until a big company is poorly run, and then they introduce phone, you know, they get arrogance,

and they get lazy, and that's when you attack. For us, for my generation, for me, disruption theory was sort of the equivalent of calculus. It sort of flipped a lot of the assumptions on their head, and it basically told you actually the opposite, which is the companies that get disrupted, the big companies get disrupted are not the poorly run big companies as much as they're the well-run big companies.

The thing that prevents a big company from adapting to disruption coming from below is that it's well-run, to be part of Clay's first book on the topic, which is it's big companies that are well-run are very focused on their current customers, they're very focused on their current customer needs. They're very focused on their current customer's ability to pay,

the revenue that they'll support. They're very focused on the margins that they can get off the current customers. And it's because they're so well run that this new thing comes up from below and looks like a toy, and they say, well, that's never going to work because all these customers that we focus on aren't interested in it. And so the gap that opens up is a gap that opens up as a result of competence, not incompetence.

And out here, that was kind of a swallow the red pill kind of moment from the matrix, which is basically the minute you wrap your head around that, you're like, oh, right? And then all of a sudden, you can, just like with calculus, you can start to explain all these things that you see in business that otherwise don't make sense, right? These big, successful, important companies with all these resources and all these capabilities

and all these incredibly short people and all of them, all the magazine covers and the whole thing. And yet they get taken apart, you know, sometimes extremely quickly. With companies going public so much later now they used to, where, when does that start? At what phase do you see this with the companies you're working with, the companies you've worked with? Is it starting before they go public?

Are people already starting to get disrupted? The big venture-back companies, are they already starting to get disrupted today, or does it happen after the IPO and people start to get complacent? So there's this thing outside the valley. You see this a lot in the press these days. Outside the valley, there's this view that Silicon Valley founders, all of us are basically arrogant and presumptuous. And a big part of the arrogance and presumptuousness is the idea that basically we're starting

all these companies that are trying to disrupt all of these established industries. There is some truth to that. But the other fundamental truth that we live with every day is the companies that get disrupted the fastest are our own companies. And in fact, one of the things I find just so amazing about the Valley, and I would say both scary as an investor and entrepreneur, but also just continuously invigorating and exciting, is exactly to your point, which is our own companies that we start can start to get disrupted very quickly.

You know, I think most good startups have maybe a five-year window before they start to get locked into a pattern of doing business with a particular kind of customer. and then these disruption opportunities emerge. And as everybody here knows, the minute an opportunity like that emerges, there are other Valley entrepreneurs who will immediately attack. And so we see the theory kicking in very quickly out here.

And I think it's almost in a mirror way, venture capital companies themselves become disrupted because there is so much money. Then what used to be a really interesting $5 million deal, as you get so big, $5 million just isn't worth your while. And so they become later in layer private equity players, not venture capitalist,

just because they have to put their money to use. Yeah. Yeah, it's an interesting trend because we have this, we have a group of kind of these microvCs or they have these kind of $50 million funds. Some of them have stayed there, and some of them have gone upstream. And then you have people like the incubators are like YC who started at the really, I mean,

when you talk about disruption, that model, I mean, they started with those first companies who nobody really cared about and now look at them now with this huge fund. I mean, Mark, do you see, how do you work with people like that in the future? Because at some point they start competing with Andresen for those later state shows. They are now. Yeah. So I would say venture capital is a case is sort of this term co-opetition. And so you're sort of competing one day, cooperating the next day.

I guess I'd say, the general thing I'd say is it's been a revolution. Like the fact that we now have YC, the fact that we have all these accelerators, the fact that we have all these seed investors, right? It's just a much more vigorous, much more diverse environment, both in terms of funding sources and then just in terms of the raw number of startups, they get picked. And so, you know, kind of to Clay's point, we find ourselves, in some cases, making events with us now as small as $100,000,

in some cases as big as $100 million. I enjoy it. I think it's great for the Valley. It requires everybody to continuously adapt, but I think it's what's keeping the Valley so vigorous. Mark said something you want to build upon. That is, part of my hope has been that if you have a theory that is useful and it describes a piece of how the world works, and if smart people understand the theory, they won't fail

nearly as often. And when you look at it in that way, historically the way we have built companies was trial and error and is a very inefficient way of starting to do. businesses. And what you see is the funds that, or the companies that you start are smart people. You teach them the theory. But that creates its own problems, doesn't it? Because, Jesus, if everybody does everything right, then... It creates the opportunity for the next wave of disruption. Yeah, that's right. Because historically, you succeeded because of their not understanding.

They had to win by trial and error. That was easy to catch. Now if they do everything right What you ought to do is you should quit And become a professor at the Harvard Business School Is that right? Is that right? Because But I mean, I just have to talk I don't have to do anything

You have to do stuff, yeah Do you think they let me up? Anybody would love to have you When the market and the climate You can kind of feel this little bit of a cloud From what it's been this like huge party The last two years and kind of over the top at times.

When the market starts to turn, when people start to get nervous about things, the venture capital, the valuations are down in Q4, when they've been up for the last couple of years. So what happens? Is this a time where big companies, as they look back right now, if they look back three or four years in the future,

is this when they're getting disrupted, or is this where when the bigger companies or even the startups, is this where they really buckle down and figure it out right now? Historically what's happened? Can I give a hypothesis? for Mark to shut down if this is wrong.

The reason why I wanted to talk about the capitalist dilemma is that, in fact, there is capital everywhere, and the cost to capital is, I mean, everybody would say that our return to capital is 15% or whatever. That's what we aspire to. The reality is the return to venture capital over the last 10 years overall has been nearly zero. And yet you've got all of this capital, you know. And so it creates behavior that you just wouldn't imagine. And the reason I wanted to talk about how there used to be abundance of bandwidth, and so you could waste bandwidth. I wonder if capital is doing the same

thing to investment. And that is, it's a time when we shouldn't husband the use of capital, but be aggressively putting the capital to work, but that also then drives up the value of the investments that we're putting our money into. I think that's right. So I think we can talk about what's happening specifically in the Valley, but there is a broader point that Clay's bringing up, which I think is important to understand, which is we all want to talk about tech and we all want to talk about venture capital,

but the total amount of money going into all the tech companies, all the unicorns, is on the order of $50 billion a year, which is a large amount of money from an absolute standpoint, point, right, in terms of just how we think about money day to day, it's a very, very small amount of money from a global context. And so I'll just give you one example of how to think about that, two examples how to think about that. So one is, about $50 billion going into high tech. This year alone, more than a trillion dollars will be distributed from just the U.S. as 500 biggest companies, just the S&P 500 will distribute more than a trillion dollars of cash

back to their shareholders, right? Which is, so those of you who are math majors, 20 times more money is going to come out of big established companies than is going to go into startups, right? And so to me, the real question, the macro question is not what happens with the 50 billion that goes into startups. The real question is what happens to the 950 billion that doesn't? And where does that go? The other macro fact that you can look at that helps explain this, I think, is, right? Globally, there's a lot more money in debt than there is in equity. Global bond markets are much, much bigger than the global equity markets. Globally, there's $6 trillion dollars of bonds that are returning negative yield. And so there are six trillion dollars, six trillion

dollars worth of money in financial instruments in the world where you have to pay for the privilege of owning them, right? You not only don't get any money, you have to pay to own them, right? And again, I just compare, 50 billion into startups versus six trillion where you have to pay to own a bond. And so I think the critical crisis in the economy at large is not that the unicorns are overvalued. The critical crisis in the economy at large is that there aren't enough unicorns, and then to Clay's point, big companies, I totally agree with him, are not being nearly aggressive enough in investing for the future, because what the markets are telling us is exactly your point. Capital's abundant opportunity is scarce.

Well, historically, there were about 10 companies every year that mattered in the Valley. Now we have about 100 companies, more than 100 companies valued over a billion dollars. Have we gotten smarter people involved? Steve Case says that, founder very well, says that 50 years ago everyone's smart went into government, and today everyone that's smart is going into startups? Is this the case that we just widen the pool? Have we opened it? Or have we been fooled by some of these companies just, you know, with the access

of capital? I think on average it's very exciting to be here. And I think that we teach marketing wrong at the business schools. Because when we want to know whether there's a

growth opportunity, we look at the numbers about how many products are being sold, and what's that trajectory up market. But what's really interesting is all of the non-consumption that's going on, because nobody has yet made it so affordable and accessible that even more people have access to it. So take, for example, the boring business of management,

and we're trying to teach people how to be managers. How many people can actually go to the Harvard Business School or, there's a school out here. It starts with an S. Oh, that's, oh, yeah, yeah, it's the backup school, isn't it? But there is so much non-consumption about how to manage in the world. And online learning and corporate universities are emerging. And so the market for learning is ballooning because it is being disrupted.

And there is so much non-consumption of so many things around us that we just narrow our potential if we think about consumption as opposed to non-consumption. On education, is the way to disrupt education is to give it to everyone for free, or is it to do with technology? Or what would you all have a take on that? So if you develop a product that is you can hire to get a job done, almost always people will pay a premium price for a better product. And the reason why people will make a premium price for a better product is if you hire

a product that doesn't do a job very well at all, then darn it, you have to shop and try something else and it doesn't work and you have to return it. the cost of getting a product that doesn't work is so costly that when you develop a product that nails the job perfectly, people are delighted to pay a premium price. And so giving anything away free is absolutely the wrong way to think about the problem. And so, for example, there's a job that arises in the Valley occasionally, which is the third of our five children actually did come to Stanford for whatever. The black sheep.

Yeah. To get a doctorate, you know. And he called this up after he'd been here for a week, and he said, Mom and Dad, I found my apartment, I need to furnish my apartment tomorrow. That's a job he had. I have to furnish the place tomorrow. If I said that's a job, is there something that you would hire to get this job done, the brand that just pops into your mind?

IKEA. Right? They have designed their system so that... anything that you need in order to furnish the apartment tomorrow, it's there. And you don't have to shop, it's there. And so the owner is the third richest guy in the world. He got rich selling low-quality furniture to the low end of humanity. And he becomes rich, right?

And why is it? People will pay a premium price for a better product, and you don't have to go to target and this and that and that to get the job done. So it's a long way of saying. I hope that we never think about free is

a pathway to... So a total solution. Yeah. Let's talk about founders versus managers. Mark, your firm is really, this is one of your kind of core tenants. What advantages does a founder, CEO have over a hired CEO that comes in

down the road? Yeah, so we think that in tech, we think founders are critically important. We think that if you just look historically at many of the great, you know, important technology companies in the last 50 years, 100 years, many of them are run by their founders for decades. And I would say it's not a religious point of view, which is it's not always the case. Like, I was a founder, I was never CEO. And so it's not a religious case that the founder always has to be the CEO. But that there's something very important about the founder or the founders,

and there's something very important about the founder mentality. and a lot of it has to do with disruption. A lot of it has to do with responding to disruption. And so in particular, I would say there's this cliché of founders that a lot of people believe or used to believe, which is that founders are too stubborn, and then founders get too locked into their original idea and they can't adapt as times change.

We've actually found the opposite to be true. We've found that when a company is going to get disrupted, the person, in many cases, with the best odds of countering the disruption, is the founder. And I think there's a couple different reasons for that. I think one is the founder remembers when the, business was nothing? The founder remembers. The audience will know this. The founder remembers what it was like when there was like nobody else in the office with you and when you carried out

your own trash can. Like the founder remembers, this thing used to be zero. And so the founders have a vision kind of in their heads. They kind of haunts them that says this thing used to be zero. Now it's something. It could be zero again. And so when an existential threat like somebody coming in with a disruptive product occurs, the founder, we often find is emotionally able to wrap their head around it and then able to actually figure out what to do about it. Because they know that if they don't. They're going to be in real trouble. The other thing we find with the founder, with the founder mentality is that the founder can carry enormous moral weight inside the company to then be able to make the changes that are required. This is sort of the old

cliche of having your name on the door. You know, and Steve Jobs goes into Apple and says times are changing and we need to do X. And X is heresy, right, as compared to everything Apple had done up until that point. You know, Steve Jobs, a founder is going to be able to convince the company that they have to do that, whereas a professional CEO shows up and says that and everybody's kind of like, ooh, you know, I don't know. And so we try really hard in our companies to have the founder be central. We, in many cases, have the founder as the CEO. And then even when we don't have the founder as the CEO,

or even when the founder doesn't want to be the CEO, we try hard to pair the founder with the CEO so that they can have those strengths. Yeah. I wonder if we could talk about a couple of companies and see how you feel about them, get your opinions on them in terms of where they're at. Let's start, Clay, with you with Apple. You know, they just feel like we're getting in these cycles, into this last year, they've gone off the two-year plan,

and now you can buy your iPhone very clearly, very simply, every 12 months, get your new iPhone, it's thinner, it's a little bit more expensive. When you look at Apple and what they're doing, do they follow this model of could be ripe for disruption in the next few years? What do you think? My wife calls me the Jewish mother of business, because the Jewish mother is always worried about everything

regardless of how well it's running, you know. So I worry about Apple. What I admire about jobs and his legacy is that he did his research in front of a mirror. And if I have a need in my life, and there isn't something I could hire to get that job done, I bet you that job arises in lots of people's lives. And I worry that Apple can easily lose that,

and do their research by looking outside and not understanding the essence of what the job has to be. So historically, they've been very disruptive at every step in the way, in ways that I didn't even see myself coming. But now I see modularity coming at the bottom of the market and accelerating the development cadence, you know. Gosh, if you guys will pray for the Harvard Business School, I'll pray for Apple. Sure, we'd be happy to do that.

I'm going to have to think about that for a few minutes before I... Before you comment? Before I agree. Mark, what would you do to fix Twitter? What do you think needs to be done at Twitter? That is an interesting question. So let me start by saying there's a lot that's going right at Twitter, and I think... I'm going to say, it's a sign of the times.

It's a sign of the times that we have a company in the Valley that's 10 years old that's doing $3 billion in revenue, And that's 300 million active users. And everybody's like, wow, they suck. Where I come from, that's pretty good. That's a pretty good. I think they have a lot to be proud of. I mean, I think their challenge is well documented, which is the growth has slowed. It's a network effect, and the growth of the network has slowed.

And there's basically two schools of thought. One is it's topping out, and it just, it is what it is, and they've reached the limit. and the other is that there are things that they could do in the product to expand the market and to have a lot more growth. And so I think they're working through right now this question, which is they either, I think, have to accept that they are what they are and that they have to lock in on that and they have to set expectations appropriately around that and then go on to become very successful doing that, basically what they are today. Or they need to do what I know certainly Jack is working hard on, which is the reinvention and product expansion.

The obvious challenge is that there are, you know, there was just Twitter. for their use case, and now there are other, you know, competition, there's competition, there's disruption, and so in particular there are services like Instagram and Snapchat that have kind of, that have taken some, you know, number of the use cases from Twitter or in the process of doing that. And so I would say it's a great case study of a company that has been very disruptive, that now has disruptive challenges, and is in the middle of trying to figure that out. Part of what causes this to happen is when you start up and you organize the company around

an insight of a job that needed to be done. And nobody's developed a product to get that job done well. The data about that opportunity is passive data. It's data about the context, what people are trying to get done in their lives, and you then respond to that passive data to develop a product that just... But then as the company becomes successful, as Mark describes it, the nature of the data that surrounds the executives changes. And now the data is all about products and competitors and features.

And in contrast to the first set of data, which is passive, in this phase, the data is very active. And if these numbers aren't pointing up all the time, you're in trouble. And so the management loses their insight. about the job and now they believe that their business is about products and features and so on and it buries what made you great and then when you get even more mature and you have efficiency innovations the numbers change again and this is all about costs and free cash and so on and that's a different language than these other two and what you've got to do is somehow

put out all of that noise in the data and come back and figure out there's a lot of non-consumption and you know how could we do the job better and so you should never say no but if they go in that direction following the numbers they'll be finished very fast alphabet reported that they spent 3.6 billion on moonshot ideas last year that's almost double from the year before certainly a unique position with the founders there. Should they be investing internally like this? Is this a good way to avoid disruption? Do you think they should just be buying more startups? What do you think? Well, what they need is not more technologies or more products. They need more business models that are new, because this doesn't make a difference until

it's this. The worst place in the world to create a new business model is within the old business model. And even a company as capable as them, they, I think, stop short. They have a great product, and then they try to find a business model to stick it in, and investing in what are new business models

that we could create. That's where growth will come from. Otherwise, it is what we would call sustaining innovations that don't, lots of innovation, but not much growth. I certainly wouldn't argue with that. I think it's very exciting, though, that we have a company and we have a CEO on Larry Page

who's willing to buck that entirely and willing to go full throttle into new areas and has the business, has the resources to be able to do that. I'll just give you, I mean, this is sort of a, here's a way to think about it. We think a lot about it from our product lands because we see the self-driving car and all this stuff, and it's all very impressive.

There's a financial way of looking at it, which is Google's sitting on how much cash they've got probably $60 or $70 billion of cash. They've got $60, $70 billion worth of cash that's piled up from just running their business, and they probably generate another, I don't know, $15 or $20 billion a year just by running their search business. And so by default, that cash either sits in their bank account

returning zero percent interest or negative interest or that cash gets distributed back to their shareholders who turn around and invest it in these negative yield bonds. I pay for the privilege to own it. And so, you know, to be able to take $3.6 billion, a year, for example, out of the 15 or 20 that they're generating and be able to put it into these moonshots that may return zero, but by the way, that money was going to return zero anyway, right? Or may return, right, may build a next giant, you know, a giant new

self-driving car business or a giant new satellite business or whatever it's going to be. You know, if they get one or two or three of these moonshots to pay off, the total return on their capital will be so much higher, right, than how any of the big established companies that are being more responsible can return. And so as an alphabet shareholder, I think you have to feel pretty good about that. Clay, a few years ago you wrote a book called How to Measure Your Life. Personally, it's had a huge impact on my life where basically outlines this theory and these tactics behind not getting divorced, not kids not hating you and not going to jail. Where did you come up with this?

And, you know, why did you put this out? Going back to something Mark said, what causes disruption to occur is not incompetence. It is you do everything right. and because you do everything right, you get killed. And nobody intended to get killed, but because they did what they thought were the right thing, it killed them. And I look at my students who graduate every year. Not a single one of them has a strategy to go out and get divorced,

or to raise kids that hate their guts, you know. And yet, a shocking number of our graduating students actually implement that strategy that they did not intend to pursue. And so what is it that causes them to do what they would not want to happen? And it turns out that it's the very same causal mechanism, and that is, I invest in things that pay off fast. So if you are the kind of person who has a high need for achievement, and that includes at least 100% of us, right?

If that's what we need to do in our lives, then when we have an extra 30 minutes of time or ounce of energy, in our mind subconsciously we will try to find, what could I do with this time and energy that would promote the most immediate and tangible evidence that I've achieved something. And our careers provide tangible and immediate evidence of achievement every day. We close a deal, we ship a product, we get promoted, we get paid, and our careers are just filled with tangible, immediate evidence of achievement. On the other hand, when we go home, it's very hard to see achievement, frankly. Our children misbehave every day. You know, the house gets messy every day.

And so when we have a choice about how do we spend this extra ounce of time and energy unconsciously, we invest our time and energy where we get the immediate return, and that's not at home. And we don't intend to invest in things that, because money doesn't bring happiness. It's just we know that, right, and yet we do it, but it's because there's because the way we allocate our time and energy driven by this achievement. So just understand for me, understanding that that's what happens, then I might be able to deal with it in a more productive way.

So I'll just give you one example, but that's really what motivated my writing the book. So when I got my MBA, I got a job with the Boston Consulting Group. And after I'd been there about a month, the project manager came to me and said, Clay, we need to meet on Sunday at 2 p.m. because we have a big client presentation on Monday. We've got to be sure everything is in place. And I said, oh gosh, Mike, I forgot to tell you, I'm a religious guy, and I just made a commitment. that I wouldn't work on Sunday and he just went bonkers

and everybody here works on Sunday and I said well I made a commitment that I wouldn't and he said look I don't know anything about your church but my church if I need to do something that's a little bit shady I just do it and then I find a priest and I confess that I did it

And I promise never to it again, you know. And he said, doesn't your church have some kind of escape gal? Whatever? And I said, I've been looking for that out for a long time, and I don't think they have it. And so I said, I can't do it, I'm sorry. Anyway, so he blustered away. And an hour later, he came back and he said, look, Clay, I talked to everybody, it's fine, will meet on Saturday at 2 p.m., and I said, oh, man, I forgot to tell you, I made a commitment

to my wife that I wouldn't work on Saturday. Mike was just even more bonkers about it, and he said, look, Clay, whatever commitment you made to your wife on Saturday, just this once, in this particular extenuating circumstance, isn't going to be okay to do it just this once? And I said, Mike, I am not on this earth to make the partners at BCG to become richer. You know, I really want to be a good husband and a good father. And if I spend my Saturdays here at BCG,

I will be implementing a strategy that I don't intend to pursue. And he was really mad at that. And so then he came back an hour later, and he said, look, I talked to the team. Do you happen to work on Friday, perchance? It turns out that that decision is one of the most important decisions I ever made, because it turns out that my whole life has been filled with an unending stream of extenuating circumstances. And if I had said just this once, the next time it occurred and the next time, you

have said easier and easier. And I decided that it is easier to hold to our principles 100 percent of the time than it is 98 percent of the time. And you know, so anyway, that's why I wrote the book. Mark and Clay, thank you very much for being here. Thank you, thank you very.