The a16z Show - Ben Horowitz on Investing in AI: AI Bubbles, Economic Impact, and VC Acceleration

Starting point is 00:00:00 You know, if you want to change the world, you have to believe you can change the world. What you're really trying to find is, are they literally the best in the world at a thing? And that's always the thing that's worth investing in, as opposed to they're pretty good at a lot of things. And I can't figure out what they're not good at. We just have a higher concentration of talent here than that's probably possible in a company in terms of just sheer IQ. There's a lot of BCs, very few who can actually help you succeed as a company. And so being one of those, I think, is still quite a special position. AI is changing how companies are built and how venture firms operate, and those changes are

Starting point is 00:00:43 forcing new decisions about structure, judgment, and speed. Traditional venture models were designed for long timelines and slow feedback. In the current AI cycle, outcomes move faster, competition is denser, and firms have to evaluate people and ideas before results are visible. That shift raises practical questions about how to run a partnership, how to hold investors accountable, and how to stay close to the work without creating friction. In this episode, Ben Horowitz joins for an AMA

Starting point is 00:01:08 to explain how A16Z approaches those problems. He discusses why managing a group of GPs is different from running a company, why the firm evaluates investors at the point of decision rather than waiting for portfolio outcomes, and how verticalization allows small investing teams to scale without internal politics. Ben also shares his current view of the AI cycle, including why AI should be treated as a new computing platform, why application design and model orchestration matter more than raw model size,

Starting point is 00:01:36 how AI pressure is reopening M&A, and why the current market reflects unusually strong demand rather than pure valuation inflation. We help you enjoy. So I'm going to start first with more of how you manage the firm, and particularly lessons that you've learned over the years, obviously extrapolating lessons as a founder as well, and then how we think about running the firm on a day-to-day.

Starting point is 00:01:59 So the first question I'll start off is from your book, but it's, I think, relevant to this conversation in part because when you wrote that in technology businesses, you rarely know everything up front, and we're sitting in this massive AI wave right now. It's still incredibly early. But the difference, of course, between a mediocre company and one that's magical

Starting point is 00:02:17 is often the difference between letting people take creative risks and then folding them too tightly accountable. So there's many ways we could take that direction. this question, but maybe first start, how do you manage a group of GPs? And particularly what's different about managing GPs versus a company? And what's the saying? It's pretty different than a company in that with a company, like there are functions, there are things, there are very specific outputs that you're driving to. And then the people in the company, I would just say, like, we just have a higher concentration of talent here than that's probably possible in a company in terms of

Starting point is 00:02:55 just sheer IQ. So if you look at Chris Dixon and Martin Casado and Alex Rampel and so forth, I mean, these guys, one, they've all run companies. And then it would just be very hard to have that many people, that high IQ on an executive staff. And so, you know, if you have somebody like Martin, who is probably the best architect in networking software in last 20 years, plus like a really talented investor and so forth, I'm not giving them that much direct. I'm not giving them that much direction. I'm more kind of helping him understand, like, how the process of the conversation affects the process of investing and kind of how you work your way to the right answer, taking the right amount of risk. And the biggest mistake we make is we get too wrapped around the

Starting point is 00:03:42 axle about some weakness that a company has as opposed to focusing on what they're great at and how great they are. So, you know, everybody is like kind of, you could talk yourself into as great at something. But what you're really trying to find is, are they literally the best in the world at a thing? And that's always the thing that's worth investing in, as opposed to they're pretty good at a lot of things. And I can't figure out what they're not good at. That's generally a worse investment. So just kind of orienting around that and then kind of helping think through the platform, the personnel, and how to deal with the conflicts and then how to close deals and that kind of thing. So it's very different, I would say. And they just, you know, like understanding

Starting point is 00:04:27 when people run out of gas, like investing in technology, you really have to be in deep in the tech to be good at it. And I think that it's very possible as people get older. They get less into it sometimes. And so at that point, we got to make a change. But maybe just sticking on the topic of GPs, how do you also think about accountability? Because one question I'd come up over when to promote the right people, when to manage out the right people, and ultimately the vertical levels are making decisions, but you're also making decisions, you and Mark are making decisions at the firm level as well. What's your sort of thinking and framework, is that evolved over the last 16 years? Yeah, I mean, I think it's evolved a little, but the main things are kind of the same. So I think

Starting point is 00:05:12 it's dangerous to in VC kind of wait for the outputs because they're so far up to kind of wait and see, okay, does somebody have a great portfolio after 10 years or 15 years before kind of deciding what to do with them? It's just such a long time. And you can make a lot of bad investments in that time frame where, like, you could miss out on a lot of good investments in that time frame if you don't put that person in position to do more stuff. And so I really try to look at, okay, at the point of attack, like, how are they showing up? Like, how good are they at finding opportunities? How good are they at winning those opportunities?

Starting point is 00:05:58 And what do we think the quality is at the time of investment? Because some work out and some don't, but it's not all magic. Like, you kind of know, how great an entrepreneur is Mira or how great an entrepreneur is Ilya. Well, like, those are pretty special people. So if you can win that deal, like, that means something, whether or not those companies work. Maybe just to focus in on verticalization, because verticalization, I think, was probably one of the seminal points in the history of the firm and changing the structure of it.

Starting point is 00:06:27 And you and Mark have talked about this. And now in retrospect, it's clear that that was the right decision at that point in time. How do you avoid some of the pitfalls associated with verticalization, meaning the communications and strengthening communication across verticals and making sure you still have that connectivity as the firm continues to size and scale? Yeah, so look, I think that the most important observation, and this is actually a conversation Mark and I had with the late great Dave Swenson back in 2009. And what Dave said, which I thought was very interesting at the time, it's like like an investing team, like shouldn't be too much bigger than a basketball team,

Starting point is 00:07:06 basketball teams, five people who start. And the reason for that is the conversation around the investments really needs to be a conversation. And so I always had in mind that, okay, any investing team, we really don't want to be too much bigger than that size. And so how do we kind of maintain that? And the only way to do it is to verticalize. And then the other thing that was happening simultaneously in the industry was software was eating the world. So we had to get bigger in order to address the market.

Starting point is 00:07:42 but I didn't want teams being bigger than a basketball team. And so that kind of led to the vertical structure. I think, in effect, the most important thing is that those teams should be good. And then the communication across the teams, we do in different ways. So one way is if the teams are very close, like AI, In for an AI apps, then we have people from each team going to the other team's meetings. And so there's like good kind of just hardcore connectivity that way. And then in addition, we've got like a kind of management meeting of that group in AD that we do.

Starting point is 00:08:20 And then we have kind of the big thing is the GP off site. So we just take everybody away for two or three days twice a year with not much agenda. I do think David Haber has this thesis of opportunity lies at the intersection. Like I think everyone not only culturally knows, but also economically, isn't. to see everyone win. And so there isn't that level of politicking. I also think that sometimes can be prevalent at other organizations where it's very zero-sum

Starting point is 00:08:49 and protecting fiefdom type of behavior as well. Yeah, that's kind of like a cultural idea that we have at the firm. I would say, I mean, the feedback we get from people who come from other firms is we have less politics than firms with 10 or 11 people. And it's just, that's a cultural thing. Like either politicking gets rewarded

Starting point is 00:09:07 and then you have everything from coups to infighting all the time and they don't like each other and so forth. Or politicking gets de-incentivized, and that's who we have here. Another point around Coltrane always remark to you, like I'm always in awe of the fact that you always hear the gas around the firm, even detail around minor things, where I'm like, how do you know that, Ben? And Mark comments, and you often say,

Starting point is 00:09:31 whenever you run something, it's got to be in the details. It's the only way to do it. But maybe I'll ask the question slightly differently. wait, how do you stay on top of the details, right? How do you hear all this? How do you find this subtle? But without also micromanaging, because I think there's also the creative sort of process of letting things run its course as well.

Starting point is 00:09:48 How do you balance those two things? Yeah, if you think about my job, a lot of it is kind of setting the direction and then making decisions when, like, things get into conflict or we're not sure what to do. And the kind of, if you think about, you know, what's decision making, it's, you know, what makes you good at it, it's a combination of intelligence and judgment, or it's judgment, kind of, which is a combination of intelligence and knowledge.

Starting point is 00:10:17 So like, what do you know, and then how smart are you at kind of turning that into the correct judgment? And the knowledge in an organization tends to live with the people doing the work. So meaning, you know, that not the manager I would say. You know, like, so it's, you know, what are the deal partners doing?

Starting point is 00:10:41 What are the, you know, kind of individual people on the IT team doing, you know, like what are the kind of accountants doing? What, you know, like, what are people on, you know, when we go visit LPs, like, you know, that's where the knowledge is, like, in talking to people who are kind of at the point of attack, so to speak, or talking entrepreneurs. And so I just spend, I try to spend enough time both, you know, kind of in the team meetings. And, you know, we're doing that. I just end up knowing a lot about a lot of things.

Starting point is 00:11:19 And then plus I'm a founder. So if something gets stuck in the firm, somebody calls me. You know, like that happens a lot. Like they're like, okay, I'm going to tell Ben, you know, like this. He's not going to like this. So this is, I think, a key thing for leaders is you never want people to think, oh, we shouldn't bother them with that. Because it didn't take me, but it took me like 14 seconds to resolve it. And, you know, generally people aren't looking for, you know, they're just looking for clarity.

Starting point is 00:11:50 You know, like a lot of, what an organization needs often is clarity, not like correctness. And, you know, if you have clarity, you can move. Yep, yep, yep, yep. Last question on verticals. So we have seven verticals today. One topic that has come up is how do we know these are the right verticals? And then how maybe give some examples of vertical ideas that you've resisted to start, but maybe sound good on this premise,

Starting point is 00:12:20 but doesn't either have the right technological legs or even entrepreneurial kind of capability around that we've decided to not pursue. Yeah, so they're really kind of, design around the market. And, you know, kind of where are the entrepreneurs? So we try to match up to, you know, if there is a big cluster of important entrepreneurs that are going to create multi-billion dollar companies, you know, do we have a team that's going to win those deals? And, you know, different categories end up having fairly different needs. So, you know, the needs of a crypto entrepreneur, a bio entrepreneur, an American dynamism entrepreneur are very, very different.

Starting point is 00:13:07 And so you kind of have to have a product that matches that market. You know, in picking markets, you want to not be too early and not be too late, right? So it's a little bit of an art. I think that what we've seen is I'm very confident those are the right markets because there is lots of very interesting activity in all of them. Now, we've got to then perform in each market. So it's not like a given just because we show up and we're Andrews and Horowitz that we're going to win that market.

Starting point is 00:13:44 But, you know, so we have to kind of evolve the team and like evolve our thinking and make sure that we win. But I think that the markets. were in are like pretty clearly very good markets. We have had, you know, a few that have popped up that, you know, people have proposed that we haven't done. I don't think we got that serious with them, but the other one was kind of ESG kinds of things, you know, clean tech, green energy, this and that and the other. And, you know, we thought that the right lens on that was much more going to be American dynamism one because it wasn't like weirdly constraining.

Starting point is 00:14:29 And it was much more oriented around the kind of economic outcome as opposed to the do good. Do good by doing well or whatever the fucking phrases. You know, like those things kind of can lead you into very weird decisions. making. So like investing is hard enough without like introducing other criteria other than is this thing going to be a giant company and make a lot of money. And you want to have a focus on that. And I think the beauty of American diet, look, there's a lot of things that like would be, you know, maybe good for America or whatever. But like there's so many opportunities in that space because the U.S. really does have to modernize the way they do defense.

Starting point is 00:15:18 We really do have to get much better intelligence and public safety to keep everybody safer. And then we've got to solve the energy problem. We've got to solve the rare earth mineral mining problem. Like there's very good problems to go dig into where, you know, if you look at like, okay, we're going to come up with an alternative energy source or an alternative fuel. you know, like that's like, will any of those work, like maybe, you know, and that kind of thing. So we never did ESG. Yeah, I remember actually as you were going through that.

Starting point is 00:15:55 I remember very early on in our discussion around American dynamism. I remember you pushing the team and asking them like, hey, is this a marketing message? Or is this like real technological transformative change? And like they went and did the work around it and like it was very clear now. Just that there was real tech change, especially happening on the supply tech. side and the defense side and really how people actually have engaged with the government. But I think that oftentimes when people ask us this question, like it's both a combination of, is there a real technology change because that's when you make and generate venture returns?

Starting point is 00:16:30 And then also is entrepreneurial talent actually there to build it. Yeah, AD is a good marketing idea. And I think what, right, when they presented it internally, they presented the marketing idea. And I was like, well, I want to know what the fund ideas. you know, like, how do I make money? Like, we have investors, we've got to make money. Like, it's a great marketing story, but like, we're not doing all that. We're going to do things that, you know, the fund is going to be less than the marketing

Starting point is 00:16:57 in terms of its focus. It's going to be tighter focus. Yeah, and then we ultimately, you know, zoned in on three kind of core vertical areas that there was actually a tech change happening. Maybe so you get it. So Mark and I believe the best thing society can do for a person is give them a shot. give them a shot at life, a chance to contribute, a chance to do something larger than themselves, and make the world a better place. That's the best we can do. So can you elaborate on this and how it's

Starting point is 00:17:22 driving how we are evolving as a firm and particularly looking ahead as people think about, you know, what's going to be a set of funds that are deployed over the next two to three years, but also ultimately have an impact over the next 10 to 15. How do you think about that as you think about leading the firm? Yeah, I think it's important to put the work that people do into context. And you know, we're in a like super special position. You know, what I wanted to get at was like if you take a step all the way back and you say, what's been good for humanity? What's been good for humanity historically is when people have a chance to kind of do something larger than themselves and contribute.

Starting point is 00:18:03 And look, and I think there are many systems ideas like, well, what if like we could make utopia or everybody equal or this and that, the other? And, you know, that's kind of ended up doing the opposite, if you look at the history of communism or what have you. It's kind of everybody has an equal chance of getting no shot is much more what occurs. And so you really want to enable contribution and kind of the rise of America kind of coincides with that rise in kind of a free market, capitalistic rule of law system. and that, you know, if you look at kind of the history of the country and the history of humanity, that, you know, the rise in wealth, lifespan, you know, population size of the earth, all kind of grew spectacularly in the last 250 years. And so America has been very important in that. And then America today is still, I think, very clearly the country where,

Starting point is 00:19:09 and the system where people are most likely to have a real shot at life. And, you know, like we've done some things to screw that up and so forth, but, you know, that's certainly still the case. And for America to maintain its importance in the world, it has to win economically, it has to win, which means it has to win technologically, it has to win militarily, which means it has to win technologically. and our job is to kind of help the country win technologically.

Starting point is 00:19:41 And it's not only important for us, it's important for the country, it's important for humanity. And that's really kind of what I was driving at. And I think that, you know, for our people, it really kind of helps them go, okay, like this isn't, you know, these things matter. creating these opportunities matter. And just to give you an idea of some of the things that leads to, so actually, you know, Jen and I were just in Mexico. And, you know, a lot of that was catalyzed by kind of a junior person on the team going, you know, what we're doing is so important.

Starting point is 00:20:26 And we need to kind of help with this alliance. We need to help secure the border. We need to help with our own kind of defense. manufacturing, we've got to, you know, help with energy. Like, I'm going to get this meeting. And then, you know, we got the meeting. And so, you know, if you want to change the world, you have to believe you can change the world. And that's a lot of what it was about. It seems like little tech M&A is opening back up. What's your view on whether that is here to stay

Starting point is 00:20:55 and whether that might actually extend to larger opportunities as well? AI is such a disruptive phenomenon that every Every company, every incumbent is under threat from like AI in general. And so a lot of the ways that you deal with a threat is you just acquire the DNA of the future. And so I think there's going to be a lot of M&A because I think that people need to reconstruct how they work they're going to survive. So if you go back, say, three or four years, I think people believe that, you know, there would be the big foundation models would be these giant brains that could do anything better than anybody. It has not played out quite like that. The way it's played out is that the big models do provide a very important infrastructure.

Starting point is 00:21:56 that all of our companies, you know, end up building on to some extent. But often the kind of, for any particular use case, the long tail of not only kind of scenarios, but the long tail or the fat tail, I should say, of human behavior is, ends of, itself being something that you have to model and understand very, very well. And so if you look at cursor, cursor consists of, I think, of 13 different AI models, all which kind of model different aspects of how you program, how you speak to a programmer,

Starting point is 00:22:45 et cetera, et cetera, et cetera. And those models end up being very important, so important that they, in fact, released their own foundation model for specifically for programming and for coding. So they have a coding model that, you know, you can swap in in place of Anthropic or Open AI if you want, or you can use the Open AI or Anthropic models with their kind of other set. And so, and that thing has gotten great adoption. So like it's kind of going, well, maybe the application behavior is actually in some ways more important and then having a gigantic, like, the biggest model train

Starting point is 00:23:26 with the most GPUs, you know, and it's not clear exactly how that plays out, but right now, currently, I would say that the complexity of the application itself is very high and is not subsumed in the foundation model. And so I think these things are not as straightforward as they appear, and the benchmarks can be misleading. And, you know, like I think that this also is showing up in every aspect of AI.

Starting point is 00:23:59 So we've seen that there's a great post that Justine Moore from our team did on, you know, there's no God-level video model, which I would encourage you to read, which kind of gets into, like, you know, look, different use cases end up needing different models, which is, again, not what we thought four years ago. For sure, yeah. That's actually goes back to when I started this webinar with your quote from the hard thing about hard things. In technology businesses, you rarely know everything up front. So as folks are figuring out everything that's happening in AI, like the calibration also benchmarking is changing.

Starting point is 00:24:37 And also the expectations around the utility of those things are changing. And also the founders that are building that are changing. So it is a very fun time to say the least, but also one in which we're learning in real time as a part of it. which can be sometimes deeply unsettling, I think, for also folks as well, who may be anxious about where evaluations are and the market and the environment as a part of that. Okay, I'm going to switch gears actually to the future of VC investing, which is very related.

Starting point is 00:25:11 So some believe leaner, more efficient businesses will allow founders to retain more on the cap table. Do you worry about that at all when it comes to ownership and what you've been, you know, working with GPs on in terms of expectations of ownership in this new environment? So I think that, like, what we've seen is we're getting pretty good ownership. So if you like, a lot of the recent investments where, you know, at 20% or better, there are ones that were not, you know, we don't get to that level of ownership, but those companies get so valuable,

Starting point is 00:25:51 so fast that it's been fine. And, you know, there have always been special companies with very, very special founders, you know, at a moment in time where, like, okay, you know, that is what it is. But, you know, for us it's, you know, for a lot of just like core infrastructure things, of core applications and so forth.

Starting point is 00:26:14 Like, you know, the ownership has been, like, pretty reasonable. Question around just the VC landscape today, because when you and Mark started the firm 16 years ago, you know, there weren't nearly as many VC firms. There's now 3,000 plus VC firms running around. There is still this rate limit of great entrepreneurial talent, but also increasingly there's more sources of capital flooding in, whether that be on the retail side, etc.

Starting point is 00:26:37 How do you see the power dynamics between, whether it be the LP, GP, and founders also a great, as you think about the future of the firm and anything you're doing at the firm to prepare for that. I mean, I think it's still like very hard to build a company and

Starting point is 00:26:54 you know, if you're just like an engineer, an AI researcher and you're kind of, you invented something and you're jumping into the world, it's a very competitive world. You know, having a financial partner that can help

Starting point is 00:27:10 you build a company. So, you know, does the initial valuation matter more of the partner? And I think that, like, you know, most entrepreneurs who are smart realize it's a partner. And there aren't that many good parties. Like, there's a lot of BCs, very few who can actually help you succeed as a company. And so, like, being one of those, I think is still, like, quite a special position. So the one area that we're kind of, you know, you're upping our emphasis in is this kind of entrepreneur who's just like starting something and doesn't, you know,

Starting point is 00:27:49 it doesn't quite yet qualify for VC money with our speed run accelerator. And, you know, one of the reasons why we're emphasizing that so much now is it is, you know, with the new tools, it is possible to convert an idea into a product much more easily than it has been in the past. So we just want to make sure that we keep a very, very close eye on that. And then, and then the brand is translating into that accelerator. We're just getting a lot of talent in there. And so that phenomenon we want to make sure that we're on top of. Building on earlier question about being multiple winners in AI, why did prior cycles of technology not play out the same way, i.e. why were there only Google Amazon, you know, a concentration of a small number of winners in

Starting point is 00:28:35 those product cycles compared to what you think about and what's happening in AI? Well, you know, we don't know quite what's going to happen yet. But I would say, you know, AI is a new computing platform. So you kind of have to look at it as like how many winners were there who built applications on computers. And like that's the order of kind of the size of what this is. You know, I think in the Internet era, if you say,

Starting point is 00:29:05 like what are all the businesses that got built on the internet? It was actually like a reasonably large number of businesses from, you know, meta to Netflix to Amazon to, you know, Google and so forth. And, you know, those were very, very, like, spectacularly huge winners. I think in AI, the products are having even bigger economic impact. And so I think there are going to be more things, certainly more companies that are worth, you know, over a billion dollars and over $10 billion. And then the last era, I mean, from what we've seen so far. But it's a very big design space.

Starting point is 00:29:54 Like it's an enormous design space. Like one, we've never seen that before in technology. And, you know, I, of course, nobody's asked me this yet, but got a lot of questions about the AI bubble. and I think that one of the reasons why people are so worried about it being a bubble is, you know, the valuations have gone up so fast. But like if you look at what's going on underneath in terms of the customer adoption, the revenue growth rates, etc., like we've never seen demand like this. And so we've never seen valuations rise like this, but we've never seen demand rise like this either. So it is, we are in a bit of a brave new world, at least from anything that I've seen in my career.

Starting point is 00:30:40 And we'll see how it plays out. But I think even like the Nvidia multiples aren't, you know, they're not like outrageous. You know, particularly when you look at the growth rate and just the size of the earnings and so forth. Like they're not historically nuts to the point where people would be claiming bubble like that. So I think that people think, oh, well, is that growth fake?

Starting point is 00:31:05 Is it this? And from what we're saying, no, like the demand is very intense. And, you know, we'll see how it plays out. But I think this is as big a, this is a bigger technology market than I've ever seen. And, you know, we'll see how many companies actually winning it. I'm going to ask you a few fire round, lightning round questions, Ben. And then we'll close that here. What will be your most played song on Spotify rap this year?

Starting point is 00:31:32 So I think it's that young thug song, do you know how it feel to see your face on the news? Mouthful. You know, that one really touches me. Like, like, giggly grumpsh. I love it. I will say, I think for me, follow the leader is going to be on one of my most plate.

Starting point is 00:31:56 I will say, that was a great song. Wrote the piece and also. saw Rakeem in person early this year at your event and then also George Clinton. It's been fun to dig back into the database of songs that I

Starting point is 00:32:14 had never really listened to. Yeah, no, that's an all-time great song. Yep, indeed. What's one AI tool that you use every day? Well, for sure, you know, Grock and chat GPT I use every day.

Starting point is 00:32:29 And then you know, probably, I've been playing with like Vio and Nana Banana a lot on a daily basis of the big guys. All right. Follow Ben's feet for Nana Banana drops. Okay. And because we ask Mark, we have to ask you, do you plan to be cryogenically frozen? Same answer is Mark. Do you plan to go to Mars?

Starting point is 00:32:57 Same answer is Mark as well. despite your background. All right. Look, I'm trying to stay healthy so that we don't have any generational transfer. But I don't necessarily believe in a living forever. I don't know. It's my destiny.

Starting point is 00:33:13 Thanks for listening to this episode of the A16D podcast. If you like this episode, be sure to like, comment, subscribe, leave us a rating or review, and share it with your friends and family. For more episodes, go to YouTube, Apple Podcast, and Spotify. Follow us on X. A16Z and subscribe to our substack at A16Z.substack.com. Thanks again for listening and I'll see you in the next episode.

Starting point is 00:33:38 As a reminder, 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. Please note that A16Z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a little. link to our investments. Please see a16Z.com forward slash disclosures.

The a16z Show - Ben Horowitz on Investing in AI: AI Bubbles, Economic Impact, and VC Acceleration

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