a16z Podcast - a16z Podcast: What Makes the Valley Work

Episode Date: November 11, 2014

Don Faul, head of operations at Pinterest and a former U.S. Marine Corps Platoon Commander, grills Marc Andreessen in front of a crowd of veterans at an event we hosted for bringing more veterans into startups. The discussion ranges from what makes great founders great; the shift to venture capital; and how Silicon Valley is all about “applied creativity.” All that, plus the three books every entrepreneur should read...

Mark, thanks again for your time. Really appreciate it. And thanks for everything that Entry St. Horowitz does to support veterans. So we have a kind of a veterans program that we built, really supported by Andrews and Horowitz, that brings together vets in the valley. And so we really appreciate it. So you started your career as an entrepreneur. You founded a bunch of companies and made the decision to transition to investing.

What motivated that for you? Yeah. So I'm trying to figure out a way to say. I'm figuring out how to say giving back without sounding too nice. So, you know, it's like a lot of things in life. You do things. In my case, I directly started three companies, and I worked with a whole bunch of other entrepreneurs.

And at a certain point, so I'd probably like anything else in life. At a certain point, you go through it enough times. So somebody once said that somebody said, what is it, yeah, bad judgment leads to lots of mistakes, which then leads to good judgment. You basically, right, you end up fighting all the fights, you end up making all the mistakes, and at some point you come out the other end, kind of knowing what you're doing. And so my partner, Ben, and I basically thought about five years ago we started this firm,

and we thought we'd reach the point where we had learned enough where we could actually be helpful to other founders who were starting companies. And so we started the firm. It's a very different experience. Our entire firm actually consists of people who were operators. Our eight general partners were all founders or CEOs or both and ran companies. We actually don't have, the one thing we don't have in our firm are any former professional venture capitalists. We decided to just, we train people from scratch.

And it's a little bit disorienting in a sense of you are used to being a builder, an operator, a founder, a CEO, a manager. You're used to making the decisions and used to actually like, you know, you're responsible and you're accountable and you actually get to make the decisions. It's your responsibility to make the decisions. It's disorienting to go into a role in which your job is to advise and help and assist and support and be, you know, be a sounding board, be a you know be a backstop be a source of support it's very great I mean I love it it's it's it's very gratifying it's you know in a lot of ways it's self-indulgent and that you the trade is you give an excuse to then work on many more things than once you get to kind of see all these different projects you get to work on you know

10 or 15 or 20 things at a time instead of just one thing and so that it's it's a wonderful job but you do definitely go into a mode that we're in now we're here to we're here to help we're here to support we're here to backstop so you've talked publicly about the way that tech companies are built has evolved over time, and we're in this third phase of entrepreneur-led technology companies. Can you talk a little bit about that evolution and how that's influenced your approach here at Andrews and Horowitz? Yeah, so there was this pattern. I got to Silicon Valley in 1993, it was kind of right in the middle of kind of the last kind of wave of how companies were built in the Valley in the 80s and 90s, which was this view

it was very common at the time, and it was basically this view that you have these founders, and They're often, the founders are often the tech geniuses and the sort of mad scientists and these people. And, you know, they're a little, you know, they're a little nuts. You know, they're a little, you know, they're in the lab and they're working away. And they, you know, they tend to have what I call the minty green pallor of sitting in front of the monitor for too long. They don't necessarily dress all that well. They don't necessarily, you know, necessarily, you know, shower every day. And, you know, they build these incredible breakthrough products.

And so the Valley kind of really understood, and the VC community really understood the value of these folks in terms of building the products. the playbook though was then okay you you they start those people start the company and then you hire a professional to run the company and you hire the so-called professional CEO which in the 90s became known as the world-class professional CEO and then because in the 90s everybody became world-class right up right up to the crash when everything fell apart and so you'd hire the professional CEO and the professional CEO would come in usually with a you either actually generally a sales or a finance background and I would take over the company, and, you know, boy, you know, good-looking people, you know, great teeth, great haircuts, you know, very well-dressed, you know, very presentable people.

And they would take over the company. And the good news of what you would get out of that is you would often get, those companies would often immediately become, you know, commercially successful in that, you know, you put somebody in charge of the company who understand sales and they go out and sell a bunch of stuff. And so the first two years, you know, often go quite well. The problem is if you've taken the product creator and product innovator out of the CEO job, then you kind of have this question of like, okay, so who's making the decision on what the next thing is? And the thing that all tech companies have in common is that the thing, you know, the product that we're going to be selling in two years, four years, six years is not the product we have today. It's whatever we have today is going to become obsolete in short order.

And so we need to, while we're selling the current product, we need to be building the next product, we need to really understand what that is. And so the pattern that we'd noticed that started developing was you'd just have this amazing slippage where these companies would do well for two years and then they would just cave in and collapse. And actually then what would happen was the other thing

was the professional CEOs after a while figured this out because it wasn't good for them either. And so then what you would find is they would sell the company. And they would sell the company basically, ideally with perfect timing at the peak of the last product cycle before the world figured out that they didn't have another one.

And then that interfered with the mission that we always had, which is how do you build big and during franchise, important, you know, our role models were always, you know, Microsoft and Oracle and Intel and Cisco and IBM and Hewlett-Packard and how do you build companies like that. And if you're just going to do a single product and then sell the company, you're never going to build a big, valuable enduring company. And so we thought, you know, boy, this model doesn't actually work that well. And then actually, what actually happened before, before we entered the scene as VCs, what

happened was Google took off. And Google was viewed from the outside as professionally, Eric Schmidt as professional CEO, but we always felt that, well, Eric was very valuable to the company. We always felt that Larry Page was sort of the secret weapon of the company. So he watched that one. And then even more significant, Facebook, where Mark Zuckerberg was the founder and CEO. And to put that in context for a second, like, Mark Zuckerberg did not have a job before he started Facebook. Like, his first job in the world was CEO of Facebook, right?

Like, didn't work over the summer at McDonald's. Like, nothing. Like, no experience, no nothing. I think people who met him in 2003, 2004. I mean, one thing, he was like literally 20, right? So part of it's just like he was incredibly young, but had no management experience. And so the idea that somebody like that would still be the CEO 10 years later was just not considered a normal thing. But Mark had these sort of these various advantages in how he set the company up.

And then, you know, people now think the results are in, but Mark turned into a spectacular CEO. And he learned the skills. And so we started in 2009 and basically decided that was going to be our template. Now what that doesn't mean is very important. It doesn't mean that sales, marketing, and finance, and all the other skills are not incredibly important. They're incredibly important, but they need to be part of an integrated team. And we find that the team generally works better if the product innovator is the CEO of the company. And in fact, the interesting thing that's happened is the same people that would have been the professional CEOs 10 or 15 years ago.

Now in many cases want to be what I call the Cheryl. You guys saw Cheryl this morning. I tease Cheryl that her name is now a proper noun. Every company wants a Cheryl, right? And so Cheryl could go be CEO of any company in the place. Like Cheryl's gets called to be CEO of Fortune 500 companies all day long. But she would rather be Mark Zuckerberg's number two and have the pairing and the team have the kind of effectiveness that they have

as opposed to her having the ego need to be the number one person. The other thing that it doesn't mean, so the team is important, the other thing it doesn't mean is it doesn't mean every founder can do what I'm describing because many founders can't. And so we do have companies that are off this pattern and where you do bring in a CEO. And then there's a whole art, and for those of you who are kind of on that track yourselves, there's a whole art to figuring out how to be the CEO of a tech company

and be in partnership with the product founder and the product innovator and not be threatened and not feel like this person is going to be destabilizing, which is what often happens when this goes wrong, but instead figure out how to be the ideal partner in with that product founder, and there's a whole kind of art and science around that. So that's the other model. Fantastic. So as you coach your portfolio companies and you have a young entrepreneur

who has a lot of talent who needs his or her, Cheryl. What are you looking for in that person? What is the ideal, Cheryl? Yeah, so, well, we're working on cloning. Perfect. We haven't quite gotten all the way there yet. Yeah, Google X might have not announced.

They might have disclosed you guys on that, but they've not told me. So, I mean, so I would say probably there's three things. So there's a skill component to it, which is the Cheryl's generally, like, you know, there is obviously an incredible art in science to being a top end operator, being able to build, especially build a high quality organization under conditions of hypergrowth, you know, rapidly hiring people. You know, it's very common to hire people at a fast rate,

the organization degrades. And so how do you, how do you do it with quality? You know, resilience, you know, things go wrong all the time. They're always, you know, disasters popping up all over the place. How do you deal with, you know, multiple simultaneous crises? And then all the mechanical, you know, the art of how to run a sales force, you know, how to run customer support organizations, how to do marketing, how to do finance. So it's kind of that whole side of things. And, you know, so these people often come up, you know, they can come up through, often sales, sometimes finance, sometimes marketing, sometimes product management.

So there's kind of different tracks where they pick up the skills along the way. That's one. Second is, I think, cultural fit. And so, and this goes back to, again, that what went wrong in the valley in the 90s. If the share, and this was actually, this is an issue kind of every time you bring these pairing together. And it was a question on very much in Mark's mind when actually Cheryl first came into Facebook, which was, okay, this person is going to show up.

And my nickname for Cheryl at the time was T-Rex, because, you know, having met, you know, talk about strong personalities. So, like, for example, Cheryl comes into, this is actually a true story, Cheryl comes into Facebook, and the first week she goes around and introduces herself to every single employee.

And Mark literally is like, what the hell? Because, like, nobody else who ever joined Facebook ever went around in your, you know, typical person who joins, well, the old joke, right, the extroverted engineer is the engineer who looks at your shoes while he's talking to you. You know, typical engineer at Facebook is like, it is cubicle, right? It's like, it's like, you know, and so Cheryl is just like a social whirling dervish through

the entire organization, and she's instantly everybody's best friend. And, you know, literally it was like, okay, is she mounting a hostile takeover? Like, what the hell's happening? And I was like, no, like, for somebody who's Cheryl with her skill set, like, she's a people person. Like, this is what she does. She, like, manages people. Like, she's going to go meet everybody. Like, this is normal.

And he's like, okay. You know, this is that. You know, this is fine. That was week one. So, like, literally, it's, you know, it's a, you know, it's a, it's a different animal. And so figuring out how to have all the strengths of that person and then integrate into the culture. And these are, you know, these tend to be, the best companies tend to be very engineering-centric and product-centric companies. So how to integrate into the culture.

The horror story, right, the cave study on the other side that went, you know, horribly wrong was, you know, John Scully, you know, when he came into Apple. you know, where it took him about a year to mount the coup and then, you know, kind of, you know, horrible things happen after that. So you've kind of got the Cheryl on one side. You've got the John Scull, you know, the other side. You want to fall much closer to the, to the Cheryl. And then, and then third is, you know, consistent with that is the specific partnership with the founder is incredibly important. And it's a, you know, and Mark and Cheryl shared an office for years. You know, they sit right next to each other now. It's, you know, they talk every day.

You have to have an incredibly, incredibly close relationship. You have to incredibly high level of mutual trust. Obviously, it doesn't just happen. It has to be earned over time. Fantastic. Can you talk a little bit about your investment philosophy? Is it the idea? Is it the people?

Is it a combination of both? Yeah, so we like to pretend. So every VC will tell you the same thing. And it is true. I mean, there's a reason why everybody says it, which is you're looking for a giant market. You're looking for some kind of fundamental breakthrough technology. And then you're looking for the team, the founder of the team that can execute against it.

And as a consequence, in our job, you sit around and you talk, all day long about the markets and the products. And so we have opinions about everything from virtual reality to data mining to this and that, robots. And like, you talk about all this stuff, and then you go out and you try to understand the markets and how industries are developing and you have all these theories.

And probably most of that is not very valuable. Probably most of that is a waste of time. I think that 90% of it, and maybe we're fooling ourselves, even with that, maybe it's 99% of it as people. And in particular, it's these very, very special founders and founding teams. And what you find, and this is maybe not surprising once you get into it, but it is surprising when you first realize it is. What you find is the best founders understand the depth.

One of the things that makes the great founders, great founders is they have depth in their domain that's way beyond what anybody, you know, what anybody else is going to have. And certainly outside of what we're going to, I mean, we cover a very broad, like, landscape of, like, different kinds of products. We have a term we use, the best entrepreneurs can exhibit this kind of behavior that we call it, we call it, they've gone through the idea maze, which is to say they don't, just like have ideas. They've tested the ideas. Like they had an initial set of ideas and then they went out and they tried to figure out how to do it and they discovered all the things that don't work and then they figured out other things to do and then they made other mistakes and they corrected those and they go all the way through and they kind of come out the other side and they kind of have this composite view of how the world works that you could only get if you had

already if you had gone through the idea maze. And then it turns out the way to test whether they've gone through the idea maze is you know you ask them questions and you ask them you ask some questions, well, you have some questions I expect that. The other thing you do actually is the trick, the twist is you try to get them to change their mind during the meeting, which is actually a neat trick because the reason they're here is because they need money. There's no other reason for them to come here other than that they need the money. And so they are very highly motivated to tell us what we want to hear so that they can get the money. And so a lot of entrepreneurs come in here and they, you know, they haven't gone through

the IDMAs. They don't have strong personalities. And we're like, well, you know, you're selling, you know, whatever bicycles and should you be selling, you know, motorcycles instead and they say that's a great idea we're gonna you know change what we do like that's a horrible sign right that's like you know we're screaming in the other direction the guys who've been through the idea maze they're like oh no no no no no no we you know you don't understand we thought about motorcycles and like motorcycles don't make any sense for the following six reasons and this is why bicycles make total sense um and then the test I do is then I try one more time to get them and change their minds and then they get mad and that's the positive sign right I'm looking for

I want to stare I want to you know how dare you challenge me um and so So they're deep and they're persistent and they're stubborn and they're courageous. You know, they're, you know, obsessive is not an uncommon thing. Like, you know, we have another term we use called, we call founder market fit. And it basically means like you find, occasionally you find somebody where it's just obvious that this is their life's work. Like this is the thing that they are going to do. I think Ben Silverman's like that. I think Pinterest is his life's work, Mark Zuckerberg, Facebook is his life's work.

Like if you took Ben Silverman out of Pinterest, like I don't even know that he has any idea what he would do. Like, he would go sit on the beach for a while and then probably be like, shit, I wish I was running Pinterest again. Like, it's who he is. It's who he is. It's who he is. The idea is who he is. The company is who he is. The culture is who he is.

And so you want to try to get as much of that out as you can. And so that's the basic formula. You try to find, you know, that level of depth, that level of persistence, that level of identification with the problem. Odds are, what we found is odds are if you find those things, it almost doesn't matter. Like, I don't know that what we think about the market or the product or the technology actually matters that much because we're we have the opportunity to place about on somebody who knows a thousand times more than we do and i think that's probably the key to the whole thing i'm i'm sitting here laughing because i'm as i hear you talk about that stubborn blank stare um i'm recapping every

one-on-one i have with ben so um it explains it not makes sense um what are some of that we're at google ox this morning and they gave you gave us a little bit of preview and so some of the forward-looking things that they're thinking about what are some of the the trends that you're most excited about where you're seeing really interesting activity. And then maybe, where's an area where you'd love to see people working to solve really hard problems? Yeah. So the big, I mean, this is a cliche,

but it's true and it's incredibly important. So the big thing happened in the world right now is the smartphone. And the significance that's the smartphone is for the first time in human history, we're going to get a computer in everybody's hands. And by everybody, I mean everybody on the planet. And by everybody, I mean people in countries

where they don't have running water and electricity. They're going to have one of these. And that's all going to happen by the end of the decade. And, you know, the significance. these things, this is a full computer, it runs software. You know, like we like to say, for real. Like this isn't an actual, this isn't a fake computer, you know, like the old Nokia phones.

This is a real one. And, you know, runs apps and run software. And then, of course, connected everybody. As a consequence of that, everybody in the world is going to be connected online. And if you think about that, like, we have never lived in a world where everybody's connected, right? We've never lived in a world where everybody has a computer. We've never lived in the world where everybody can run software.

And we've never lived in a world where everybody's connected. which means we've never lived in a world where everybody can learn anything they want everybody can get any piece of information they want anybody can connect to anybody they want anybody can get access to any market they want like so and if you think about that like if you're in the developer world like we are you think about that and you're like oh my god the market size like you can now build products and services like Pinterest or Facebook or Google and you can like conceivably have everybody on the planet be your customer and that's never been possible number one but number two everybody else can build right and so we've never been in a world in which if you're a, you know, I was think, I grew up in rural Wisconsin, and I was think about the 14 year old in rural Wisconsin or in rural Indonesia or in rural Argentina or rural China and the difference between growing up, you know, without one of these and with one of these and being able to take Khan Academy courses and be able to get, you know, over time, be able to get university degrees online and be able to start businesses and be able to access markets, be able to publicly organize, you know, is a huge, you know, you put these things in people's

hands and you get, you know, I don't like, you know, Arab Spring, this plus Internet equals Arab Spring. It was not an accident that that happened kind of right after smartphones went critical mass and the internet went critical mass in those countries. And so this is the big event kind of of our time, is everybody getting a phone and everybody becoming connected. As a consequence of that, we have this thesis that we call software eats the world, which basically says that if everybody has a computer, then you can kind of take any field of human activity, whether it's media or education or entertainment or you know commerce or you know take your information whatever communication and you can say well what if we could basically you know

forget how it's done the past what if we could do it in software right what if we could write an app write a website you know write a database that would do this thing and if you apply that to e-commerce you get amazon and if you apply that to communication you get Facebook and if you apply that to you know looking up information you know from the card catalog to Google you know a very, very big advance that follows. And so, I mean, one is we fund a lot of companies that are building the infrastructure and kind of the plumbing for all this. But the other thing we do is now we're going industry by industry and trying to figure out

where are the opportunities to build incredibly powerful, important companies. You know, there's a pair of companies, Lyft is ours and then Uber, which is obviously very successful, you know, that I think are a great case study of this right now, you know, which is, and they're deceptive, like, because, you know, use Lyft or Uber for the first time, and it's like, it seems like it's another way to hail a cab or something, which is just not that interesting. And then you realize, you know, wait a minute, like it's, we call that softwareies transportation, which is like, what if every driver plus every passenger, plus every car were part of a network through software? And what if everybody knew where everybody else

was? What if all the drivers knew where all the riders were and vice versa? So what if everybody knew where all the cars were? And what if you could optimally match supply and demand between riders and drivers and routes and vehicles? You know, what could you do? Well, you could do a whole bunch of things. Like, for example, you could give people the ability to go anywhere they want whenever they want for less than the cost of owning a car. You could take the utilization of cars. Typical car sits, I forget the number. The typical car is in motion 4% of the time.

Some shockingly low number, utilize 4% of the day. And then the typical car on the road has 1.2 passengers, right? The ironic thing about traffic jams is because you're in traffic jams and you're saying there. It's like, what a bunch of assholes all driving around by themselves, you know? And then you sit there by yourself. And so what if, you know, you start running these thoughts. experiments and say, well, if we could have like a properly clearing market for drivers and rides

and cars, you know, what could the average utilization rate for a car be? What could the average number of occupants for a car be that's in motion? And then you think about the self-driving car, you pull the Google thing into it. And then you say, well, if you didn't even need, if you didn't need the driver, then the car could be a motion all day long, right? There's no reason a driverless car can't be on the road 23 out of 24 hours a day. And then you run the numbers and you say, well, then how many cars in the world would you need? And the answer is like a fourth or a fifth or a tenth, the number of cars you have. per capita and then you look at things like you know global consumption of steel and rubber and glass

and you look at carbon emissions and you look at all these things and you're like oh my god like we can like you know like why environmentalists are not out on the street cheering Uber and Lyft like I don't like they just haven't figured it out yet but like it's the lever to use to go after all these environmental problems and then you think back where you started which is an app that just made it easy to hail a taxi right and so so that's the kind of thread that you pull right and then as a consequence by the way as a business, the businesses like Lyft and Uber have the potentially far larger than anybody anticipated and far larger than the taxi market ever was because they're unlocking behaviors that were never possible without, right, without the software. And then they only work

because you know that all the riders have a smartphone and all the drivers have a smartphone. Because if everybody was still doing this on desktop, like, you know, you don't have desktop PC in the car. Like it was not going to work until the smartphone came along. And so that's an example. We're doing software eats real estate, which is Airbnb. You know, there's a whole series of these. The big ones that we're working on right now that we've done some work in that we want to do more in are education, health care, and financial services. And those are the three really big ones that we think are up next. Fantastic. All of that was totally clear to me the first time I used Lyft. Yeah, was it? Yeah, yeah, yeah. I thought the same thing.

Me too. Me too. So we spent a day visiting Google, visiting Facebook, and I was reminded today of the first time that I walked into Google having spent the beginning part of my career in the Marines, which has a slightly different corporate culture. Silicon Valley is a really special, very different place. What do you love most about the Valley and tech, and what do you wish would change? Yeah. So, I mean, the creativity, I mean, applied creativity, it's hard to, it's hard to think of a place and a time in which you can have these crazy ideas and, frankly, these crazy people, and then they can actually, like, make those ideas a reality and have a big impact on the world. And of course, Google's ground zero for that, and these other companies are as well.

And so, like, that's really magical and special. And by the way, one of the things that you struggle with with these companies as they grow, right, is as they, you know, companies grow, they become a bureaucratic, which is how do you preserve the creativity as they grow, which is, you know, one of the perennial problems. So that's on the one hand. On the other hand, there is this fundamental challenge, which is, you know, a creative idea in a lab somewhere doesn't affect the world. Like it doesn't change the world. The world is a really, this is our kind of standard speech to the founders is the world is a really big place. And for your idea to actually matter to people's lives, you have to get it out into the world,

which means you need to build a company that is going to be able to have a major impact, which is not going to be a small company. It's not going to be a lean startup. It's not going to be any of this stuff. It's going to be a real company. It's going to have sales, and it's going to have marketing, and it's going to have field operations, and it's going to have offices, and it's going to have lobbyists, and it's going to be a thing. And, well, we do this thing.

This is less common now, but for a long time, Google first became successful, you know, selling these ads. And you can go on the Google website and you can buy these ads. And so this myth developed in the entrepreneur community that basically said Google was 100% of self-service business. And so the myth was all Google has. They just have engineers. And then all the money just shows up by magic because people come to the website and they plug in their credit card number. And the money just flows. And so therefore, Google doesn't need to hire salespeople and therefore my company will never need to hire salespeople. And so then I'd say, well, how many salespeople do you think Google has? Say, you know, none.

I'm saying, no, no, they actually have a sales force. How many people in Salesforce? I don't know. 200. No, the actual answer is 10,000. And you know, the jaw drops, right? And then what on earth could 10,000 people possibly, you know, do selling ads? To which the answer is the world is a big place, and there are a lot of advertisers. And by the way, most of them are not going to show up on your freaking website with a freaking credit card. And just, like, plug it in. Like, you have to actually go, you have to go talk to people.

You have to go introduce it. You have to sell. You have to build a sales. You have to sell. And there are no shortcuts. You actually have to go do it. And, you know, same thing, Facebook, you know, usually big sales. Salesforce, you know, you have to go do these things. You have to go do all the other

things. HR. This has become a thing. This one's less, I'm laughing out of like pain. HR. It's like, why do we need HR? Well, because people are people and like stuff happens. And like you should have somebody in the company who's a professional who knows how to deal with people. Oh, we don't need that. Everybody's, it's a big happy family. Everything is fine. And then like, invariably within six months, there's just a horrible catastrophe, right? There's just some, invariably, almost invariably actually and again this is not I'm not laughing ha ha I'm laughing because oh my god

invariably it's a company party with alcohol right a lot of flashbacks there you know and then like you know next Tuesday okay here comes you know and here it comes and you know the first time you get the bad behavior the lawsuit the whatever it is or the first bad termination

it's always bad terminations it's all these things and then and then it's just like shock and horror because there's this sense of like incredible personal betrayal inside the organization like how could one of our family members turn on us. And then we start having the conversation of this is my old boss used to say, this is not a family and I'm not your daddy. Like this is a company and like these are like professional adults with like expectations for what's going to happen in their careers and they like expect to be treated responsibly. And like this stuff matters. And then they run the

gauntly they like at some point they go oh okay now I get it. And then you know they come out the other end and they they hire the HR person and they kind of figure it all out. But it's shocking right now. This is our maybe our biggest issue right now is how many of these companies have to learn it the hard way. But anyway, so these companies have to be real companies. They have to be scaled companies. And then they have to come out the other end as high quality companies. And so it's, you know, the central challenge is always, how do you marry the creative genius and the great products and the great ideas? And then how do you build the high quality company out the other side? And then how do you bring together the team, you know,

to be able to, you know, because that's always a team, right? There's no individual who can do this. The case for doing it in the valley is that they're, you know, just like there is a place in the world that is the best place to make movies, which is Los Angeles. And there's a place that's the best place in the world to run an investment bank, which is probably either New York or London. And there's a place that's the best place in the world to make red wine, which is France. And, you know, there's, you know, there's a place that makes the best clothes, which is Italy. Like, there's, there are specialists. Like, there are communities and cultures and bases of talent and environments in which you just have, you know, you have an ecosystem. You have an

entire network of people and resources and support for doing a certain kind of thing. And Silicon Valley for basically an accident of history in tech turned out to be that place, which again is not to say that it can't be outside the valley, but it does say that the pattern is best exemplified in the valley. The most predictable place we're doing this in the valley. The majority of the companies that do get built that are successful are in the valley. And you just see it. It's just at this point, it's 40 or 50 years of history and you just drive up and down one-on-one. And it's like, oh, there's Oracle, there's Intel, there's Cisco, there's Apple, and you just, and then there's Facebook and there's Twitter

and there's Google and there's Pinterest, and you just see it. And so what's the Valley Magic? The Valley Magic, it's a bunch of things, but at the core I think of it as we call it a network effect, it's a virtual cycle. It's a question of like there's lots of talent outside the valley, but on the margin, where do the best people want to come to?

Like if they're going to voluntarily locate somewhere like out of college, where are they going to come? Many of them are going to go other places, but the marginal one is going to come to Silicon Valley. You know, where are the if you want to be a venture capital, if you want to be a venture capital, if you want to be a lawyer that specializes in tech companies, if you want to be a salesperson who specializes in tech companies, if you want to be a marketing person who specializes

in tech companies, there's a natural draw. And then you have this, and I'm an import, and so I say this all in an admiring way as opposed to certainly claim your credit for it. But the consequence of that then is there's a culture. There's a very specific culture, which has to do with the expectation here is that there will be new tech companies. Like the expectation is not that you'll, like Detroit, Detroit, the expectation of Detroit is that 50 years from now, the three big car companies will be Ford GM and Chrysler, right? The expectation of Silicon Valley is the opposite. Like, we don't know who the big three tech companies are going to be, but they're almost certainly going to be new. And everybody sitting, working away at Google and Facebook and all

these companies is thinking, that could be me, I could do that, right? And that's a reversal of what you find in a lot of places. And so it's a special culture. And then you go through this thing as an entrepreneur that I went through, which is you poke your head up and you say, you know, I want I do this and, you know, instead of everybody laughing at you, which would be the case in a lot of places in the world, everybody says, oh my God, how can I help? Like, what can I do to help? You know, who can I help you meet? You know, boy, can I come work with you? You know, can I give you money? And so this whole kind of system and support structure kicks in that kind of turbocharges the entire thing. So, yeah. And Druson Horowitz is five years old. You're five years in, and by all

it counts off to a great start. As you reflect on what you've learned over the course of the first five years. What does the next five years look like? And how do you apply those learnings? So it's funny, for a tech startup, five years old is, five years is starting to get old. So people would be like, well, what are you going to do? You're going to go public? Like, what are you going to fail? Like, what's, you know, something's going to happen. For a venture capital, for venture capital firms that are longer lived, they go for, when they work, they go for 30, 40, 50 years. And the reason for that is like we make these, we make these investments. You know, we're making investments over time. We've made probably 70 kind of main investments.

the significant size investments over the last five years. We've grown in that period, so most of them have been in the last two and a half years. Those investments in total, it'll take 10 years probably to find out how well the portfolio does. Some of those companies have already succeeded, and in some cases we've sold them, and they've gone public, and we've already gotten the returns. In other cases, we like to say in the business, the lemons ripen early. And so, you know, we've had other companies, you know, go under and more on the way. We told our investors, we told our investors, when we raised our first fund, we said,

look, we're not in this to hit singles and doubles. We're in this. We're either going to give you, you know, grand slams or strikeouts. And then I said to give more, put more of a point on it, we're either going to get to the moon or we're going to leave a giant smoking crater in the ground on every investment. And so every time we have a company just horribly fail, I call all the LPs and I'm like, see, we're delivering in our commitment to you to deliver, to deliver the smoking craters. So it just takes, it just takes, it takes a long time, especially across the entire portfolio. And so I sitting here today can't even tell you like what our returns are going to be from the first like three years. Like we don't know, we don't know yet. Like even our

first fund, we don't know what the returns are going to be. So one is like we're still, we still feel like we're in the middle of proving ourselves. And so the next five, I go through all that because the next five years for us has a lot to do with proving what we've, the claims that we've made in the first five years. The opportunity for us is we're established, you know, we have enough of, we have, now we have a reputation, and people know who we are and people know what we stand for. One of the things we've really tried to do is really, we brought, we market, like we broadcast, we tell people what we, and a big part of that is we tell people what we stand for. And you can go to our website or you can go to, you know, to our Twitter feeds, and like you can, or you can

watch our public speeches on YouTube. And it's like, it's very clear, like, we may be right or wrong, but we have a definite point of view. And so we have an opportunity, it just helps us in the mind of the entrepreneur, they know what we are. And if there are kind of people, they tend to come talk to us. And if they think we're nuts, they tend not to come talk to us. And so it's a kind of a selection process. So we have the opportunity to work with, you know, hopefully a significant percentage of the great entrepreneurs in the next five years. We have the opportunity to invest in their companies, help them build their companies. I think we have this big opportunity, like I said, I think because of the technology change is happening now,

we can do more and more in fields like health care and education that have historically been difficult to build new tech companies in, I think it's going to get easier. Easier is the wrong term. I think it's becoming more possible. And then the payoff is much bigger. These are becoming much more important topics that you can go after a software. So that's a big part of what we're going to try to do. Why don't we open the questions? So when you raise a new fund, how do you decide what's the right size of the fund? Yeah. So we argue. We argue, we have an almost continuous argument about that. Where we come out on it, it's also, there's actually a very practical.

answer to this. So venture capital firms, the best venture capital firms have a very specific fee structure for the amount of money that they get paid. And the money shows up in a combination of what it's called management fees, which are kind of an annual, you get like an annual 2 or 3% to, in theory run the firm. Most firms, the general partners, put in their pocket, take it home and buy vineyards and yachts. In our case, it pays for all this. And so, you know, it pays to keep the lights on. And then the other side of it is what's called carry, which is participation in the profits, which is what we use to recruit the GPs, the general partners. And, you know, our GPs are some of the most successful founders and CEOs in the Valley, Lars Dahlgard

and Christexson people like this. So we have to have a very, you know, we have to have a certain profile for what they're going to be able to do over 10 or 20 years. And so it's sort of a premium fee thing. And so we basically will raise, we'll basically raise as much money as we can. And I'll explain why, but we'll raise as much as we can consistent with being able to invest it judiciously and then consistent with being able to maintain our fee structure. So we would not, for example, raise twice as much money for lower percentage fees because that would be the wrong long-term trade-off. The other thing is, I said, invest it judiciously, like do we think the opportunities exist, which directly relates to the fee structure, which is if the opportunities don't exist,

we shouldn't be making those investments because then the returns will be lower and then we'll end up not getting the premium fees anyway, and so it won't work. And so we kind of like run it, of through this process where you kind of come out the other end and say, okay, for this number of venture investments, this number of growth investments at roughly this pace, you know, relative to the total opportunity set with this quality level, you know, with this number of GPs, we think we can do this number of deals, that's this much money, and then we do this sort of sniff test of like, are there that many high quality opportunities? And we think the answer is yes.

So we kind of dial it in that way. You know, it floats. It varies. What are some of the assumptions that you had when you started? Yeah. change? Yeah. And maybe on top of that, what are some of the things now that you're thinking about experimenting

on, like maybe we could do this differently? Yeah. So let's see, a couple things. Well, the big thing that's changed is, I mean, we raised the fund. It's funny, the timing matters a lot. So we raised the first fund in March of 2009, which was coincidentally the low point of the stock market after the financial crisis, after the crash. So the financial crisis, the heart attack, right, happened in September 2008.

But the stock market kept falling for another six months. And so we timed it perfectly. We invested it right at the bottom, which does not, in retrospect, was a good thing at the time was just misery, right? Because like in March of 2009, the last thing any investor wanted to hear about was a new venture capital fund. Like they could not have been, like it was. And by the way, Matt, the good news is we were the only people doing it.

Like we were the only, we were the only investor on the road raising money because everybody else was hiding under their desks. So we like to say, at least people took meetings with outside of curiosity. Like, these people out of their freaking minds. And it was as much, it was a $300 million fund. Like, it was a small fund. And so we took us about three months. We were able to do it.

A big thing just happened is, you know, between 2009 and 2014, you know, everybody's kind of still in a bad mood about the economy, but like, there has been a recovery. And the stock market has almost tripled. And, you know, a lot of America, you know, it's not all rosy. Like a lot of people, unemployment rate is still too high. And a lot of people are, you know, are not doing as well as they would want to do. is not as bad as it was in 2009. It's not as horrifying as it was in 2009.

And then along with that, like, a bunch of the things, a bunch of assumptions that we had or things that you would have wondered about have actually come true, right? So, and again, I'll go right back to it. And, like, in 2009, like, this was still new and it was still unclear, whether this was a toy for rich people or whether this was something that everybody was going to have,

and now it's totally clear. It's going to be something that everybody has. You know, we were still up in the air. there were still fundamental questions about, like, how big could e-commerce get? There were fundamental questions. What social networking going to work? There were a lot of skeptics of things like Facebook and Twitter still in 2009.

And so things have just, like, you know, the economy's recovering. Some of the infrastructure layers work better. Cloud computing works better now. Smartphones work. You know, another, I don't know, in the last five years, like another billion people are on the Internet just in the last five years. So, like, the market size is larger for all these companies. and so it's really funny because like this entire time

then there have been people along the way have been screaming oh my god it's a new bubble right and so we've been kind of you know it was felt to us like we're making like the industry is making real progress in building out you know really important new capabilities for the world but against this massive wall of skepticism and

and cynicism we think it's all for real I mean now the other possibility of course is that I'm full of it and this is all like just a bunch of hot air and that like you know it's entirely possible this is 1999 all over again and you're going to remember this meeting. It's like, oh yeah, I remember when Andreessen was going on and on and on and then everything went to shit, which is what would have happened if we had had this meeting in 1999. So that's a possibility, but I think the stuff is working. Not everything is working, but the things that are working

are working really well. So it's maybe an evolutionary answer to the question, but it's just we now know a lot more than we did in 2009, a lot more the building blocks are in place to do the really big things that we want to do. So that's one thing. The thing that we're trying to figure out right now. Probably the thing we're trying to figure, the single biggest thing I'm trying to figure out right now is I just went through and basically described right, I talked about the criteria and I said it's like 99% or you know something people. It's this intangible thing. There is another theory of foot which is, you know, the sort of the big data theory, which is, you know, the other way to do it would, you know,

like we back these companies, like we back companies in financial services that are using big data to do things like credit scoring. So a small business doesn't need a loan officer to come inspect it. Instead, you just like, look, you plug into the accounting system and you analyze the data and you decide whether to extend credit. Or we're back in these companies that do the so-called quantified self, where instead of a doctor meeting with you once a year and saying, boy, you look sick, you know, instead you wear the wristband and it gives you all your health instrumentation and your pulse and your blood pressure and you, you know, you kind of have all this data. Venture capital has not been affected at all by this approach, you know,

big data approach. And so one question would be, the question we're trying to figure out is, okay, like between Google search listings and Facebook likes and tweets and, you know, e-commerce volumes and app download charts, like there's all these sources of data that in theory you could kind of filter and sort through all the data and you could surface out the other end of that and say, aha, you know, the big unexpected winner is over here. And by the way, maybe not in Silicon Valley at all. Maybe it's in, you know, the company just won the TechCrunch Disrupt Award is from Croatia. And so maybe the company is in Croatia. And maybe we would have just never met it because with our fancy network

on our office and the whole thing, you know, they would have never been able to get here, but they built this thing and it's working, and maybe that's how we should be surfacing companies. And so it's kind of a 180 degree different approach from the one we have now. So we have a team on it, we're playing with it. We're trying to figure it out. Awesome. So the last question, Tathiel. Yeah. You talked about

fun size and what's the average amount of money you put in the company? Yeah. And you mentioned lean startup. Yeah. sort of why we go to the back end of what do you put the typical software company and juxtapose that to the new trend of lean startups and incubators all that fun stuff yeah so let me explain my reference to lean startup so um so first of all the lean startup let me give you a couple a few books if you guys have so there's basically three books that you should read highly recommended and they're all three friends of mine um so the lean startup book by eric reese is very very good um and that book should be read front to back second is uh ben horowitz's this book the hard thing about hard things i can't recommend too highly And the third is Peter Thiel just wrote a book called Zero to One, which is extraordinary. And so if you read those three, those are the three books that I wish had existed when I got here.

Like they actually tell the modern Silicon Valley story in a really fundamental way. And by the way, they're actually about three different parts of the process. Lean Startup is about the raw start from scratch. Ben's book is basically about all the heavy lifting that takes place. And then Peter's book is about the big ideas, like how to do the really big things. And so they're nicely complimentary. So I can't say enough about good things about the Lean Startup book, and I can't say enough good things about the Lean Startup Theory.

And the Lean Startup Theory, for those of you who haven't been following it, is Lean Start Theory basically is fail fast, and so run lots of experiments, and then if you're going to fail, fail quickly, as compared to basically committing with no data, building up a company and organization raising money, and then discovering $10 million and $50 people later that's not going to work, and then you're really in trouble. that's a great theory and it's a great tactic. It gets translated by entrepreneurs who are under tremendous pressure into, it literally gets translated and it's shocking how it sounds crazy. It's translated into failing as almost the goal. Like you get, it's really weird. You get founders come in here

and they're just proud of the fact. They're just thrilled with the fact that they try four things and they all failed. And I'm like, you realize failure is not actually the goal. Like I know it says fail fast in the book. That's the tactic, not the goal. Like that's different. Like the goal is still to succeed. Like there is still the success thing. And by the way, the success thing does not just happen overnight. Like it's not like you don't, Pinterest is like a great, in fact, Ben Sumberman is actually on the record is saying had I read the lean startup book, I never would have done Pinterest because it took us four years to figure. If we had, if he had known about the lean startup thing, he would have given up at some point in the four year slog that it took

to actually make the thing work. So I think there's something of the tactic. I think that it can't be used as I see it being used in the valley as a crutch to not commit. And I believe that that's really important because I think the really big success has only come from serious long-term commitment. So it has a role early on, but at some point you, at some point the founder and the company have to commit to something and have to really slog it out. And Ben's book talks about this a lot. He talks about what he calls the struggle, which is that, you know, long and painful process between we think we have something, you know, and then global domination, you know, is the struggle. And it's just, it's the uphill climb. And it's the

uphill climb in which you're hitting boulders and falling down the hill and all kinds of bad things and shale storms and like all kinds of bad things are happening and you you know you have to decide am you know it's you have to decide am i going to quit you have to decide is this worth it you know you have to decide like you know people by the way you know not everybody stays with you know people like fall off the trail like people people quit and go home you know there are crises of confidence um every company i've been a part of that succeeds there's crises of confidence along the way and is there a core of the company that has the commitment level and the determination and the courage to say no we're not going to quit you know screw that you know failure sucks

I refuse to go home not having made this thing work and my friends are all off and this is the thing that happens in the valley like my friends are all off and it seems like they're all unsuccessful companies and so why is mine failing and god damn it and so it's like the pressure is real

and it's intense and so that's why when I make that reference I make that reference which is I think I think 90, 95, 99% of it is commitment and determination of courage well Mark thank you so much we really appreciate your time and everything thanks everybody

Thank you. Thank you.