Welcome to The Knowledge Project. I'm your host, Shane Parrish. I'm the author of the Farnam Street blog, a website with over 70,000 readers that's dedicated to helping us learn by mastering the best of what other people have already figured out. In The Knowledge Project, I interview amazing people from around the world so that we can all learn from them, expand our minds, and challenge our thinking.
On this episode, I have Chris Dixon. Chris is a partner at perhaps the most famous venture capital firm in the world, Andreessen Horowitz, or commonly known as a16z. We talk about the history of venture capital, why companies fail, the future of artificial intelligence, and the idea maze. I hope you like this interview as much as I did. I'd love to hear your feedback. I'm Farnam Street on Twitter. That's f-a-r-n-a-m-s-t-r-e-e-t on Twitter.
Chris, thank you so much for coming on.
I'm wondering what's a typical day look like for you, for a VC?
Yeah, so it's a good question. It's an interesting job. I think I guess I would divide my calendar somewhat between two broad categories of things. One would be meeting with entrepreneurs who are starting companies and raising money and coming to us to talk about potentially investing. And then the other half the time working with existing investments to try to help them, you know, everything from maybe they're raising more money or they're trying to recruit somebody or close a sale or some other kind of thing like that. So, roughly, I would say kind of half and half kind of looking for new things. And what that means is basically a lot of meetings.
So, it's a big change for some people. I had a background in computer programming. There's a great Paul Graham blog post, it's called "Maker's Schedule, Manager's Schedule," I think, where he contrasts kind of the schedule of somebody who builds things—so like a computer programmer or a carpenter or what have you—versus sort of a manager. And VC is very much manager, so it's sort of one-hour scheduled meetings as opposed to kind of, you know, eight hours of getting into a flow state and thinking about a topic.
The bad part is it's sort of a lot of state switching and kind of jumping around. The good thing is it's a fascinating job. You get to meet with incredibly smart and passionate people who are doing interesting things, and they tell you all about what they're doing. So, if you're intellectually curious, it's a pretty amazing job because one minute someone's telling you about some breakthrough in biotech, and the next minute you're talking about data center infrastructure, and the next minute you're talking about computer security, the next minute you're talking about, I don't know, the transportation industry, you name it. So it's a fun job.
Sounds amazing. Can we just back up for one second just so I don't make any assumptions here? So you work for like a venture capital firm, a16z. I'm an outsider. Can you explain what does that mean?
Yeah. So, I work for Andreessen Horowitz, which shorthand is a16z. It was a firm founded in 2009 by Marc Andreessen and Ben Horowitz. Marc and Ben both, prior to that, Marc had co-founded Netscape, which was the first commercial, popular internet browser, and then they went on to do a bunch of other interesting startups. Maybe if you want, I can back up and tell you what venture capital is more generally and a little about the history of it. Would that be helpful?
Great. So basically, venture as an industry started in the '40s and '50s or something. I mean, the kind of practice goes back further. If you go back and look at wealthy entrepreneurs, even 200 years ago, a lot of them, after they made money, would then invest in other entrepreneurs who maybe had a good idea and some good new technology, but not enough money to run it.
Actually, I read a great book recently about—it was *How the World Was Won*. It was about the laying of the first transatlantic cables in the 1840s, where they actually laid the cables onto the ground. If you read about all those things, they were always funded by, in some cases, governments, but a lot of times some crazy entrepreneur who had made money and then was investing in some other new thing, right? So there was always this practice going way back.
But then what happened is, really in the 1960s, it became kind of formalized as an industry called venture capital, and there were firms kind of around—it all happened in Silicon Valley around the rise of firms like Intel, Apple, Microsoft. And there were firms like Sequoia and Kleiner Perkins and other firms that basically started off as people investing their own money in new technology companies, and then at some point became formalized and became the way it works today, which is today we don't really invest our own money. We invest other people's money. Specifically, a lot of our money comes from places like universities.
But you're not investing your own money.
No, no. Most VCs—I mean, we do invest our own money. The way it works is we have a fund and we raise money for a fund. Some of that money does actually come from us personally, but a lot of it doesn't. A lot of it comes from, for example, large universities. A lot of this was pioneered by places like Yale, for example, very famously started doing this in the '60s, where basically they have their endowment. You might read about it; Yale has a large endowment. And they basically put some portion of that in bonds and some portion in stocks, and they want to put some portion into other asset classes, as they call them, that have long-term horizons.
So basically, what's nice about those pools of capital is that they kind of plan things out on a 10-year or even 30-year horizon, which matches kind of our time horizon. So basically, that's what this industry is. It gets a lot of attention in the press, venture capital, but it's actually a very small industry. There are probably a few dozen firms that constitute the majority of the industry. Maybe a few thousand people work in the industry at the most. The amount of money invested is on the order of like $10 to $20 billion per year, which sounds like a lot, but it's actually smaller than the R&D budget for Apple and Google, for example. So as much as it gets a lot of press, it's actually what most people consider kind of a cottage industry.
The tech world, I mean, it seems pretty clubby from the outside. To what extent is that true?
Yeah, I guess it depends who you ask. The cynics would say it is clubby and kind of insiderish or something. My feeling is it's small and people know each other, but there's an ethos of kind of inclusion. Anyone who's worked in the tech industry for more than a few years has seen people rise incredibly quickly. Take people like Mark Zuckerberg or all these kinds of entrepreneurs. Anyone who's worked in the industry for 10 years has met people like that who are now incredibly prominent back when they weren't, and is very used to new, very successful people coming out of nowhere.
As a result, the industry is very inclusive, and people just sort of expect new things to pop up, and people are very responsive to new people coming. Everyone in Silicon Valley—and by the way, people say Silicon Valley, but I think that kind of spirit is now happening in places like New York and LA and Canada, in Europe and Asia.
Do you think that's a byproduct or do you think that's something conscious, like people are trying to develop the same culture, or do you think it's just happening naturally? Why is it spreading?
I think part of it is people see the success of Silicon Valley and want to emulate it. I think part of it is I see a lot of people who move to California to join the tech industry and then decide it's too much of an industry town and then they want to move to New York, for example, to have more diversity. What's great about places like New York and LA as an example—I spend time in both places—is you're surrounded with people that are in the arts and media and all sorts of other kinds of industries, and that kind of creates a different creative dynamic.
So I think it's just the natural kind of maturation of an industry, and as it spreads out, you have it kind of propagating to more places. In China, there's other specific things. China is its own story probably, where it's a country that sort of decided that tech is strategic and has invested heavily in it. So it's a multifaceted kind of story there, I think.
So the firm that you're a partner at, a16z, has a stellar reputation. I mean, how did that come about? What do you guys do differently?
Yeah. The kind of philosophy of the firm is a little different than the traditional philosophy in the industry. Traditionally in the industry, there were very few venture capitalists, and so what happened was, if you were an entrepreneur, you had to basically go to one of these 10 or so firms and pitch them your idea. These firms kind of thought of themselves a little bit the way maybe a hedge fund thinks of itself, as their job is to come up with theories about where the future is going and pick the best entrepreneurs, and then once they invest, they kind of hang back and kind of monitor their investment in the same way that a hedge fund or someone might.
With our firm, we think we've kind of flipped the model, where we think of ourselves primarily as a service firm. So we think of ourselves the way maybe a law firm or talent agency or someone would, where our first job is to provide services for the entrepreneur, and our secondary job is to sort of pick the right company. So the service we provide for entrepreneurs, we basically are staffed very differently and structured very differently than most VC firms. We have over 100 employees who are not investors at our firm, whose sole job it is to help companies do things like recruit employees, build their customer base.
So now that people are seeing success with that, are your competitors copying that model, or...
I think to some extent. It's also a very different financial structure, so it's hard to copy because the traditional structure is basically that VC funds charge fees, and then most of those fees go to the partner salaries. We don't. Instead, we put our fees towards these operating teams. So for our competitors to copy us, they'd have to dramatically change their own compensation and pay structure.
Which isn't likely, right?
Well, I think we are seeing—I think you will see more and more of our kind of style. I think it'll probably come from newer firms. Look, my broader view would be I think it would be great if more firms did what we did. I mean, yes, it would be competition on the one hand; on the other hand, I think it would be good for entrepreneurs and good for the system in a way.
I think it's better for the system just to have more alignment between the investors and the entrepreneurs, and it's investors acting themselves more like entrepreneurs who are taking risk. Our sort of compensation is aligned with the entrepreneurs. Most of the money, if we make money on this, will be because our companies are successful, not because we collect fees. So, yeah, we've worked very hard to help entrepreneurs, which we think is primarily where hopefully our positive reputation comes.
It seems like from an outsider's perspective that companies are staying private longer in the funding cycle than they ever have before, and the valuations for some of these companies—I mean, the rumored valuations before they become public, like Uber at $50 billion or something. What do you see as the implications and second-order effects of this? This seems like an unprecedented kind of scale.
Yeah, it's a great question. Part of the answer is: why are they doing it? Because they're able to do it, because basically, if you read the press, they kind of confuse this issue a lot. They say that VCs are investing in companies like Uber at later stages. Actually, we don't do those kinds of investments for the most part. What is happening is firms that historically had been public investors—so, for example, Fidelity, T. Rowe Price, Wellington, all of these kind of well-known public market investors—have now moved to invest in private companies. And so they're the firms that are leading a lot of these later-stage investments.
Basically, for a variety of reasons—it's a complicated story—one reason that companies are staying private longer is the perception among the technology community that the public markets are somewhat short-term focused. If you just go read Barron's or The Wall Street Journal and things, there's an extreme focus on kind of what happens next quarter: do they make their numbers that quarter, as opposed to are they investing for the next 5 to 10 years.
Push back a little on that. Like, aren't Fidelity and the T. Rowe Prices of the world who control hundreds of millions, billions of dollars in shares in a company, aren't they the ones that could be setting that in the public market to drive the expectations to be longer term?
Yeah, no, that's a good point. And I think that that would be a good counterargument. I'm not saying this is a settled question. I think this is sort of two sides of the debate. One side of the debate would say that public market investors are short-sighted. The other side would say what you said exactly, which is there are these very long-term investors. And to your point, look at Amazon as an example, where it seems as though the investors have accepted the idea that they'll be investing for the long term and forego profits for a very long time.
On the flip side, Facebook and Google most prominently, they have dual-class stock, which means that when before they went public, the founders structured it so that they could never basically get fired by Wall Street, right?
What do you think of that?
I think it's great. I'm a proponent of that. If you just look at what's happening, I just don't think you can plan technology investment on anything shorter—just the way technology products' life cycles work, I think it works on a minimum of, let's say, a three- to five-year cycle. I just think it's very hard to have that kind of managed by a committee. So I'm not saying that those founders—it's less that they have sort of superpowers and more just simply that you really need sort of a small group of people or one person who's managing for a very long-term horizon.
If you just look at what Facebook and Google are doing right now—I mean, I also have specific experience with some of these companies where—I don't want to name the specific companies, but some of these public companies where I think the CEOs felt like they were completely handcuffed or something, just simply couldn't make the kinds of investments they want to make.
So, I generally think in technology things need to be planned on a longer-term horizon. There are a variety of different ways you could accomplish that. One of them is dual-class stock. There are other proposals out there, for example, to increase short-term capital gains to disincentivize short-term trading. I think that's another good idea. There's a variety of kind of proposals out there. I do think, though, that in general, long-term planning, long-term thinking is very good for us as an industry, country, world.
Yeah, I'm a proponent of long-term thinking.
I think dual-class stock is one mechanism to get there. I don't know if it's the best mechanism, but I think it's one of them.
So I have a question, but maybe you can explain funding right before that. But my question is like, to what extent is the first round of funding really about preserving optionality for the future so you can double and triple down on success, or is it more about funding the idea fully, or walk me through some of the thinking.
You said from the venture capitalist perspective?
From your perspective, yeah. What are the stages and why would you invest at a particular stage and what are you looking for, just briefly?
Yeah. So, basically, there's—just some quick nomenclature—there's generally what's called seed investing, which is one or two entrepreneurs, maybe a couple and an idea, and that's also called angel investing sometimes. Usually, it's individuals writing checks or small firms, and maybe they'll raise something like a million or $2 million, and that kind of gives them enough money to build a small software team that can build a first product. Okay. And that's something I used to do. At a16z, we don't do much of that anymore. We do some of that, but not as much because we have a bigger fund and we tend to focus on what's called Series A and Series B.
Series A is usually after a company has built an initial version of a product and is now ready to build out the product more and start selling it or taking it to market. Series B is usually a little later when they've got some initial results and now are trying to accelerate those results. Those will typically be—in Series A, let's say $10 million might be an average investment size, and Series B $20 million or something like this.
And your Series A deal usually includes the first right of refusal, I would guess, on further funding, or...
Yeah, it usually lets us have what we call pro-rata rights, which means we're allowed to invest a certain portion in the next round of funding, and mathematically it's enough that we can preserve our ownership percentage.
Yeah. So basically, it just lets us keep investing some—not the whole round. It's kind of technical, but basically the idea is just that we have the right to keep investing some amount.
The industry's changed a lot. In the past, maybe 10-plus years ago, VCs would actually take control of a company in many different respects, including the board of directors.
Yeah. And there's all these horror stories of them firing the founders and things.
That's not something that we do. We really just don't even take control for the most part; most don't now. We couldn't fire the founders if we wanted to. Not that we do want to, but we couldn't.
And if you get a reputation for that, you'd probably stop seeing deals, right?
You'd have a very short career, basically. So, not that we want to, but even if we did, it's just not the norm to have those kinds of provisions.
So, basically, for the most part, it's a very simple transaction. In all the areas of finance, it's probably the simplest, which is we give somebody, let's say, $10 million, and in exchange, let's say we buy 15 to 20% of the company, which means if the company sells for, whatever, $10 million, we get 15 to 20% of that. For the most part, that's kind of what it is. There's a little bit more structure; there's things called preferences, which basically means that we get paid disproportionately more on certain downside cases and things like this, but it's relatively simple.
To what extent—you say you do more Series A than angel investing, and if I understood what you were saying correctly, you're more investing in people in the angel stage. To what extent in the Series A are you investing in people versus investing in the idea?
Great question. I think in Series A, it's definitely—certainly people is 90% of it, and the idea is also important, with the proviso that the idea will, at that point, we know it will change. So it's kind of more like you're investing in the general direction of the idea because just the world changes.
I remember when Dropbox—take an example, raised a Series A, I think it was like 2008. At the time, it was really pre-mobile. The iPhone had come out, but it was much less widespread than it is today, right? If you look back at the original pitch deck for that company, or let's say for Facebook for that matter, or LinkedIn, or all these companies today, Pinterest, none of them really had mobile as a big part of their business plan because mobile just wasn't—it was still feature phones, right? It was still like those little Motorola phones where you have the little keyboards and stuff.
And so the computing world dramatically changed in the last seven years. If you invested in those companies early on, like a Facebook, you knew you were investing in a social network. You didn't know you were investing in a mobile apps company that eventually would buy Messenger and buy Instagram and all these other things, right? So directionally you're investing in an idea and you're investing in people, but you also know the world will change dramatically in unexpected ways. And so what you really are kind of looking for is kind of like these kind of black swan, antifragile ideas of you're really looking for what some people call optionality, meaning things which—you can't predict the future, but you can see that there are certain scenarios where these people are rewarded.
That's the thing you have to understand; it's very hard to internalize, I should say, which is that the best VC funds lose money at least half the time, which means, if we're doing a good job, half of our investments will fail. And then some small portion will be huge hits, and some other portion will be modest hits or something.
I wonder if most people even get that in the stock market.
Yeah, no, it's very skewed in that way. And in fact, I wrote a blog post about it if anyone's interested. It's on my website, cdixon.org, called "The Babe Ruth Effect." We have data...
I remember reading that, yeah.
There's a lot of data in the VC industry that, interestingly enough, the best firms actually have a higher loss rate, meaning they lose money more frequently than the less...
But when they win, the magnitude is so much greater.
I'm not a big sports guy, but in baseball, it's what you call slugging percentage, which is home runs you hit, even if you have more strikeouts. The two tend to be correlated. So it's sort of an unnatural way to think in some ways because when you meet entrepreneurs, you're not—you're sort of thinking somewhat like, "Will they succeed?" but you're also thinking probably more about, "If they succeed, how big could it get?"
And so you have to kind of train yourself to think that way, and frankly train yourself to be accepting that a lot of what you do will fail. It's one thing to realize that in the abstract and write a blog post about it like I did; it's very different to actually experience it because these entrepreneurs are your friends and you're rooting for them. The reality of this job is you spend a lot of time kind of helping people in tough situations.
So if you had to group the failures into kind of three buckets between leadership, execution, and idea, what percentiles would you kind of put on those?
I think that's a good question. I guess it depends on the stage. It's very different in different stages. But there's some reasonable percentage of the time where the entrepreneur kind of does everything right, and just the market—whatever, Google releases the same product and gives it away for free or something, whatever it might be, that things happen that are beyond your control that just make it—or regulators just decide, you create a new kind of drug and the FDA decides not to approve it or something. There's certain things that are just external factors, and that's probably—I'm just making up a number—25% of the time there's some external factor that is completely beyond your control.
And then I think some portion of the time the hypothesis is wrong about the product and the market, and that's a pretty high percentage of the time. I think then the question becomes—with really good entrepreneurs, they're able to kind of adapt then, and, as some people call it, a pivot or something where you change what you're doing, and so that's always an interesting kind of scenario.
My overall learning having done this for eight or nine years now—I've only been a VC for two and a half years, but I was investing personally before that for six and a half years...
Successfully, too, am I not?
Yeah, it was pretty good. I would say my biggest learning is it's probably more people than I ever—I probably thought originally it was 70% people, and now I think it's 98% people or something like that. It's a lot people.
That kind of begs the question: what's the difference then between a bad founder and a good founder, so to speak? Not to categorize them, but...
Yeah, I think a lot of it is not necessarily that they're good or bad, but it's what we have a concept we call founder-market fit, so the kind of fit between the founder and the market, meaning are they uniquely suited to do something in that market. A lot of times in our business, that means they have a strong technical background. Maybe they have a PhD from Stanford or MIT in computer science. That's probably, frankly, a third if not half of our investments are like that, or people just with very strong technical backgrounds.
A very typical story is: "I was at Berkeley and I worked in their big data lab, and I invented this new open-source data analysis tool and now I want to go make a business out of it." That's literally a company we funded called Databricks, which is a technology called Spark. That's probably a third to half of our companies: someone with very deep expertise.
And then they have to learn—obviously their background is in, let's say, computer science or some other technical field, they have to then go learn kind of how to run a business and how to hire people and how to get customers. But we kind of make the assumption that that's easier to learn than the opposite. It's easier to teach a computer scientist business and vice versa. You're never going to teach a business person computer science on the job; you have to go to school for that generally or have some kind of long work experience. So a lot of it is technical expertise.
Sometimes it's domain expertise. Someone comes out of the media industry or the fashion industry, whatever industry it might be, and says, "I've been working in this industry and I realized there's a whole bunch of things that are done in backwards ways, and I have ideas on how to improve them."
and it comes from years of experience and deep expertise in that field. That's another common one. Another one will be kind of like maybe like Airbnb, where just for whatever reason, it seems like those founders were part of a certain cultural movement that was around, just sort of maybe it was a generational thing or I don't know what it was, but people had been sort of sleeping on friends' couches and things,
Seeing that behavior emerge, and
and sort of built out, kind of rode that cultural wave. So that's typically a very important, the sort of founder-market fit. I think also a lot of it is just tenacity. Almost all companies we're involved with run into extreme adversity. I've almost never been involved with a company that didn't have moments of almost failure. And so it's how resilient are the entrepreneurs?
How do you go about determining that? Like, how do you go about testing their grit, their tenacity or not?
It's a good question. It's very hard to do. We do spend a lot of time with the entrepreneurs and try to get to know them. I think a lot of it will come in through their personal backgrounds. It's one reason why you'll see a lot of VCs will invest in repeat entrepreneurs as an example, right? So if you look at Travis, who founded Uber, he had been involved in, I think he started two companies before and had a long track record. He had varied levels of success, but people who knew him spoke very highly of him as a tenacious and resourceful founder. There's lots of examples of that of people with some kind of track record. If they don't have a track record, it's hard, and it's something you really don't know until the moment the adversity comes.
What are the obvious things you're trying to avoid in founders?
Well, I think at the moment, startups are having a moment of kind of pop culture trendiness or something. There's a lot of news articles about startups and venture capitalists.
It's become very sexy, right?
Yeah, you know, in the Social Network movie things. So I think what we're having now is a bunch of people entering the industry who maybe are coming into it for the wrong reasons, who come to try to make sort of quick money or something and really just not—
They don't appreciate how hard it is. And how do you pick somebody like that out? When they come and they present to you, how do you determine that, "Oh, I think they're in it for the money versus I think they're in it because they're passionate about the idea," or some other narrative that we want to wrap around that?
Yeah, a lot of it's just depth of experience. How long have they been working on the problem? I'll just give you an example. I was an early investor in Kickstarter, and Perry and Yancey, the founders of Kickstarter, they didn't have kind of the classic computer science background I described.
They had basically been working on the idea for, let's see, I'd say seven years at the time.
And had tried everything to kind of get funded, and you talk to them and it was really motivated. The original idea for Kickstarter, Perry was living in New Orleans and he was involved in the music and art scene and had wanted actually a service like Kickstarter for himself, because I think he had tried to organize a thing where a band that he wanted to come play would come play and he had a bunch of fans who wanted to see them, and he just didn't have a way to kind of coordinate the two things to have the fans put the money. He didn't have Kickstarter.
And he kept thinking about that, and he kept thinking about going back in the history of the arts and the patronage model, going back to the Renaissance Italy and things, and how the internet could kind of let you reimagine that model. When you talk to him—so I think I invested, I don't know when it was, like 2008 or '09 when he was first starting—it was clear this was a person who was, this was his white whale he'd been pursuing for forever.
And you could tell just you ask him questions and the depth of thinking, he had thought of everything. We have this concept we call the idea maze. And the idea maze is sort of the idea that startup ideas aren't really just kind of a static thing. You see the TV or the movies and they have these people have this epiphany and imagine that it'll be like an intermittent windshield wiper or something. In reality, it's much more of kind of a maze, meaning you sort of imagine how the product might work, but then you imagine if the world responds in a certain way or the technology changes in a certain way, here's how I'll adapt. And you sort of imagine yourself traversing through a maze, and at various points in the maze there might be a dead end, or there might be a trap, or there might be a prize or something like this. You don't really know how the maze is going to turn out when you first start, but really obsessed founders will have thought through all the possibilities.
And so a lot of what I like to do, at least when I meet with entrepreneurs, is kind of try to traverse that maze with them and understand the depth of thinking that they have kind of gone through to get there. And so in a case like Kickstarter, I'm not saying it was an obvious investment or that it was obviously going to work, but I will say that it was obvious that they had thought it through very, very deeply. It was a mission for them. It was not a fun, new career choice or something done for some kind of more mercenary reason.
So, the answer is this is not, there's no great science to this. People have tried many, many times to use data science and other things to try to quantify these kind of questions you're asking, and the results have been pretty poor. It's been very hard to predict these things.
I was hoping you had like the secret recipe for us.
I wish I did, and I've certainly tried. Many people have tried. A lot of it's like any kind of creative endeavor. How do you pick a musician early on? How do you pick a writer early on? Having spent years practicing in the field is very helpful, but ultimately a lot of it comes down to kind of an art, I guess.
So many things do. Switching gears just a little bit here, what's one thing that you think the future holds that no one is talking about?
Good question. I don't know about no one, because I think—
Maybe I could change the question just to say some of the things I'm excited about. I think some of the investments I've made have been things that are somewhat unpopular. Not unpopular, but I would say controversial. I'm an investor in a company called Coinbase, which is the leading Bitcoin company. So I'm very excited about Bitcoin as an example, which I think is—
Currencies. I was an investor in Oculus, which Facebook acquired, which is a virtual reality company. I'm very, very excited about virtual reality.
How do you think that's going to change our lives, virtual reality?
I think when we look back on the history of computing, the key milestones will be—I'm at the extreme end of excitement here, but there'll be the PC, the Macintosh or something like this, then the internet was the next key moment, and then the mobile phone like the iPhone, and then I think virtual reality will be the next wave.
What about artificial intelligence?
That's another interesting one, and that's sort of separate but related. I'm happy to talk about that too. I think virtual reality though will—I don't know how long it will take. Oculus is announced they're going to release their consumer product in the beginning of next year, and I think initially for the first year or two it'll be primarily used by people playing video games,
