Inside Venture Capital with Scott Kupor (a16z): AI, Startup Fundraising, & more

Yeah, so if we were here at this time in 2019, let's see what's changed. We had a presidential election. We're about to have another president. That's changed. No, look, I think the biggest thing that has changed in the environment is, look, we have had a market correction from a valuation perspective, right? So if you basically look at 2009, which is when we started, coming right out of the global financial crisis, until let's call it, you know, November of 2021, we were basically on a largely monotonically increasing valuation curve over that entire period of time. It's not entirely true, right? Because we had, there was 2016, if you all remember, when Donald Trump got elected the first time and when Brexit happened in 2016, we had some kind of hiccups in the capital markets. 2018-19 we had the same. Of course, we had this thing called COVID. So it's not that we didn't have any kind of interruptions, but I would say in general, kind of everything was up and to the right.

And then, look, the big thing that's changed in the environment is going into '22, many of you may recall the environment changed meaningfully, right? So NASDAQ was down 36, 37% that year, but basically the unprofitable software index, which is basically kind of the high-growth companies, was down like 69% that year. And what it meant for a lot of us in the industry, and maybe for many of you who were in companies at the time, was, you know, this idea of growth at all costs really kind of just evaporated effectively overnight. And we now had to grow at some reasonable cost in terms of cash consumption and unit economics and other stuff. So that's probably, I would say, the biggest thing that's changed.

The other biggest thing, of course, which I'm sure we can talk about, is what, or maybe what hasn't changed, is we continue to see just new waves of technological innovation, right? So if you just ignore macro business cycles for a second, what hasn't changed, even from, you know, literally, you know, kind of the early 1970s, is every 10 to 15 years we tend to have some major technological innovation that basically drives the large, you know, kind of accretion of, you know, investment opportunity out here. And so, of course, if you just go back in our recent histories, we had, you know, kind of cloud and AWS that gave spawn, of course, to the software as a service category. '07 we get the iPhone, '09 we get the App Store, which gives rise to, you know, the Ubers and Pinterest and, you know, kind of Lyfts and all those things, Airbnbs. And then we get kind of, of course, you know, obviously now AI obviously is a very investable category.

So that's kind of, I think, the constant that, you know, is always the North Star in this business, which is just like the steady progress of technological innovation. And as long as you believe that happens, quite frankly, what I try to do is, look, I think you have to kind of just ignore the macro cycles because, look, they will go up and down. We know that. And they will get too rich at some point and they will get too depressed at another point. But what really matters is, are we making steady progress on the technological side?

So I think the basic trend is still consistent with what maybe, you know, you heard me talk about many years ago, which is if you look historically at data, basically, you know, kind of from the 1970s until the early 2000s, most venture-backed companies went public between five and six years after starting. And the size of those companies was very small. So kind of at its low point, these were companies that were doing 15, 20 million in annual revenue. And, you know, look, we can debate whether that was good or not, but certainly, you know, that's dramatically changed. If you look where we are today, we're kind of 10 to 12 years on average for most venture-backed startup companies. Many of them have, you know, hundreds, if not in some cases, obviously billions of dollars.

And I think I won't bore people with how we got there, but I would say the very quick summary of how we got there is it's very hard generally in our public markets to be a small-cap company. There's one big exception to that, which is the biotech industry for those of you who do life sciences. But in general, if you are not in biotech, it's very hard to sustain a public company that probably, I would argue, doesn't have close to at least a $5 billion market capitalization these days. And there's lots of reasons for that, but the basic simple reason is, look, like mutual funds are big, hedge funds are big, investment banks are big. It's very uneconomical for them to trade stocks that are basically relatively, that they just don't have very high volume of trading and don't have lots of liquidity around them. And that's often what happens kind of in these smaller-cap stocks.

So I think the trend hasn't changed at all. I think, you know, I was talking to an LP this morning about this. I don't think we're going from like, you know, five to six to 10 to 12 to 20, basically. I do think there are a couple natural forcing functions that prohibit us from getting there. I think one is still employee liquidity. And there are some companies, but there's very few. There are the Stripes of the world or the SpaceX of the world who can do employee liquidity programs that can kind of release the tension for employees to get some partial liquidity. But to be completely honest, I think that number of companies is a very small number of companies.

And then the other thing I think that still drives companies is it's still much easier to do acquisitions, do M&A activity as a public company. It's still hard to do private acquisitions because you're constantly fighting about whether your valuation is real or stale or what happens. So I think we're not going backwards to five to six, but I think we're probably at stasis somewhere in the 10 or 12 range.

Yeah, it's a great question. So I would argue that if you look at the data, this trend towards staying private longer actually predated the rise of, let's call it, if I'll use your term, mega funds. So it predated that. I think what actually happened is, my personal view, I think is what happened, I think the data bears out with this, is there are some companies who kind of decided to stay private longer, along with other companies, of course, where we've had governance changes. So I don't want to blame it all on Mark Zuckerberg, but I would say there was this offshoot of what Mark Zuckerberg did, which was change the governance structure, change the board composition. And again, we can debate whether those are good or not, but I think they're undeniable that, you know, kind of they happened. And along with that also ended up, you know, kind of staying private longer.

I think what happened is the money basically followed those trends basically. And so the initial money that came in was mutual funds coming from the public markets into the private markets. The next money that came in, of course, was the hedge funds. Many of us, of course, know about Tiger Global and stuff like that. And then I think what happened, my personal view at least, I can tell you what happened inside of a16z, is we said, wait a second, like why are we ceding that territory to folks like that? Right? So like we know these companies, we've been on the board with them from very early on. We feel like we have unique insights into their business. We think there is an opportunity for significant appreciation. Like why shouldn't we kind of, you know, follow these companies longer than we have?

So I would argue, look, if we take the counter, which is, look, if we just disappeared or other mega firms disappeared, I'm not convinced that other money wouldn't still support this activity. To your question about like what do we want, look, we clearly want our companies to be public companies. There's no question about that. And so look, this idea of perpetually private companies, I just don't think is going to exist or work in this business. This is a cop-out, maybe, to your question, but look, I think companies should go public at the time that it's right for them to go public.

I think what we are seeing now is as much as it can be a mistake sometimes to go early, it can also be a mistake to go too late, right? So these are product cycle-based businesses, right? And the danger of being too late for going public is you end up with declining kind of revenues or declining growth rates in revenues. And now as a public company, you have to kind of catch the next product wave. We know that's a lot easier to do, obviously, kind of, you know, as a private company. So I think we've seen some companies that kind of just have mistimed things in a way that kind of where longer is not necessarily better.

Yeah, all right. So look, I feel very good about where we are competitively, and I don't mean that to be rude or arrogant or anything, but look, I think we benefited a lot from a couple things. Number one, look, there's no question we benefited from being in a bull market, right? So we started the firm in '09. It was a contrarian idea to start a venture capital firm in 2009, right? So for those of you, again, who remember your history, you know, we have 2008, like the start of the global financial crisis, in, you know, Bear Stearns goes bankrupt in March of 2008, Lehman Brothers goes bankrupt in March of 2009. And, you know, we have obviously what looks like kind of the end of the world in terms of kind of, you know, major economic growth. So we were lucky. Look, I think we had a great story, but we were lucky to be able to raise a fund in 2009.

I would say we were also lucky, and this was where luck played to our benefit, was we were lucky to be a new firm in 2009 because what we didn't have was all the legacy portfolio companies that all the existing venture capital firms had to worry about. So you've heard me say this before, but I always pitch this: if you're bored tonight watching election returns and you want something else to do, go Google Sequoia RIP presentation from 2008. And what you'll see is this 7,500-page PowerPoint presentation that Sequoia gave to all their portfolio companies. And it's RIP because literally it had a skull and a crossbone and a tombstone on the front, and it said, rest in peace. And basically they said, look, like you will never raise another dollar again. The world is coming to an end. Put all your money under your mattress. Like this is it. Like, you know, go kiss your kids goodbye, basically.

And look, I mean, I say that part joking. It was a common thing at the time. The implication for that for the venture industry meant that if you were an existing venture firm in 2009, when we started, 99.9% of your energy and effort was devoted towards, you know, kind of salvaging your existing portfolio companies. And we had the beautiful luck. And it's, you know, it's not, we did decide to raise money in the global financial crisis, but we didn't like say, okay, let's like, you know, opine a global financial crisis so that we can raise money, basically. But we had none of that, right? So what the benefit that we had was we were this nice shining, you know, kind of, you know, gold, you know, coin on the hill or something.

And we could say basically, look, we are open for business, and we don't have any of these portfolio companies. So if you are an entrepreneur in 2009 and you are excited about starting a company, you know, maybe we were the only game in town, quite frankly, to a certain extent. So I bring that up not to say, you know, like that's always a good strategy, but I would say, look, what to me, what that illustrates is, look, there's always an element of strategy and planning, and then there's always elements of timing, right? Marc Andreessen has said this many times, and I think he's right, which is there's not necessarily any bad ideas that could be venture-backed companies, but there is often bad timing. And we experienced it personally as entrepreneurs, right? We started this company called LoudCloud in 1999, which was basically we were trying to be what is now Amazon Web Services, and like it turned out we were just like too early, and you know, it just wasn't the right time.

Or again, for any of you who are old enough to remember, you know, Webvan, you know, kind of Instacart 20 years later became the successful Webvan that couldn't exist in '99, or Chewy.com became the successful Pets.com that couldn't exist in '99. So anyways, luck and time, of course, plays a big role in all this stuff. So I guess to your question of kind of what's happened and what's changed over time, I think we've, look, the biggest thing that we have benefited from is we now have a track record, which we just didn't have, right? So in '09, when we started the business, the way venture capital firms competed against one another was, you know, they basically competed by, you know, saying, hey, we have backed these various great companies. Don't you want us to back you?

I mentioned Sequoia in this context out of deep respect because they're an incredibly great firm. If you go to the Sequoia conference rooms, you will find posters of all the companies that they backed before, right? So you'll see Cisco and Apple and all kinds of other stuff in there. And to their credit, they did that. When we started in '09, we didn't have any of that. So part of also what we did, which worked out well, was we had to change the basis of competition in this industry. The basis of competition previously was, I funded Apple, I funded Cisco, I funded Microsoft, therefore you should want me to fund you again. In the absence of that, we basically had to say, look, our differentiation is going to be we are going to kind of, you know, talk about building a firm that is founder-first, you know, that kind of, you know, is started by founders, that kind of understands the founder journey.

And then, you know, we had to kind of, you know, help the industry kind of change marketing to there. I mean, I would argue, you know, if you look back now 15 years, I think much more of the industry now has kind of shifted its marketing there. And that just means obviously we have to run faster and harder certainly than before. But I would say that's kind of the big thing that we benefited from was kind of being able to kind of change the marketing-based mindset of how entrepreneurs thought about venture capital.

Yeah, so let me start at the very highest level, which is, look, the fundamental question any of us who sits on this side of the table has to ask every day is, what do we do differently that is of value to an entrepreneur? And I bring that up to say, look, like again, the nature of this business has changed a lot, which is there was a time where the value that venture capitalists brought was capital. Like capital was scarce. The VCs had the money, and that was really the derivation of the power of venture capitalists. And that's again not an indictment of the industry, but that's a lot of how the industry worked from early 1970s kind of into, you know, mid-2000s.

When we got to the point, particularly, I think it's very hard to kind of overstate the significance of Amazon Web Services and cloud computing generally, right? When you get to the point where you don't need to raise venture capital money to do what we did at LoudCloud, which is buy Sun servers and Oracle databases and Cisco networking equipment and storage equipment, but you can rent that, you now convert what was a multi-million-dollar initial investment into hopefully a couple hundred thousand investment. Some of you may know Mike Maples from Floodgate, a really fantastic firm. When Mike started his firm in, I think, '07 or '08, his mantra was $500,000 is the new $5 million, basically, right? And what he meant was with the advent of cloud computing, we don't need a $5 million investment anymore. We can do a $500,000 investment.

And so I think that has just totally changed the nature of this business, which is we need to do two things as a venture capitalist. It used to be you just had to be smart to pick a great company. Now you have to pick a great company and you have to win the right to fund that company, basically. And so I say that humbly in front of a bunch of, you know, entrepreneurs, which is, look, you know, I know raising capital is hard, and I certainly don't want to minimize that at all. But I would say relative to kind of how the industry has evolved over time, like the entrepreneur is in a much more privileged position, I think, in terms of capital raising than certainly, you know, you were 15 years ago.

So I think that's kind of, you know, that's what's changed, you know, in the industry over time. What does it mean for all of us? Like, look, we've taken an approach where, you know, as John said, like we have what we call a bunch of operating teams that kind of help our companies on sales and business development and, you know, policy and regulatory and marketing and all kinds of stuff. And it's big now. We have over 300 people in those teams out of a firm that's like 550 people. And look, that's our, that's the model. That's the way we've decided to exercise that. But look, that's not the only way to do it. And there's lots of other firms out there who do things differently.

But I think the fundamental question that we always have to ask ourselves is how do we earn the right to be able to hopefully convince you that we should be your right partner? And so for any of you who are raising capital out there, I would just ask you, you should ask the same question in reverse, which is, okay, like what is it that this venture capital firm or partner or person brings to me? And look, maybe the answer is you don't want anything, and that's okay too. Like maybe you're like, look, I know everything. That's totally fine. And the reality is all I want is a check. You know, I would argue, I think, you know, like you might be, you know, kind of, you know, cutting yourself short by doing that.

But ultimately, I think that's the fundamental question to ask is like, what do I think would be valuable to help me achieve my dreams as a founder? And do I think this individual or this firm or this set of people can help me get there? And if you think we can do that, great. If you don't think we can do that, then like go to the next person, you know, down the street.

Yeah, so the big functions inside our firm are you've got investing teams, you have these operating teams, which I mentioned, and then look, for a firm of our scale, so we're managing, you know, kind of, you know, 40-plus billion dollars in assets today. Look, we have a functioning company, right? So, you know, we have HR people and legal people and compliance and, you know, finance and, you know, all the other things you'd expect to have. So I don't, I'm not sure I can tell you the exact numbers, but I would say roughly, let's call it like 300-ish in the operating teams. I would say probably 100-ish or so on the investing side, and then probably 100-ish on, let's call it, broader, how do you run the firm?

On the investment side, the vast, vast majority of resources are on the early stage side. So we have basically seven different early stage funds that map to different verticals, so everything from life sciences and healthcare to gaming to what we call American dynamism, which is kind of, you know, think of that as like national defense and public safety and space and energy and things like that. And so we decided very importantly for us from an organizational perspective that we basically, you should think of each of those early stage funds as basically their own business units inside of a16z.

So just like in a big company, right, you often have like a general manager of a business unit. These are basically business units. And what I mean by that is they have full responsibility for all investment decision-making and they have full responsibility for all budget and kind of operational headcount decisions, right? So if I'm running, if I'm Andrew Chen and I'm running our games fund, not only, you know, kind of am I accountable on the investment side, but also if I decide, hey, look, you know what, I need to hire more sales and marketing experts to help my companies get better penetration with the studios, and I think I need maybe less people on the talent side to help them hire engineers, like that's my decision as Andrew Chen running that thing.

So you should think of them as business units that are accountable. They have a budget they're accountable to, and then of course, obviously, they're ultimately accountable to the investment returns. And then on the growth side, growth is a single fund that is not bifurcated by industry. Now, each of us has different areas that we focus on within the growth fund, but you know, for a, we just raised a new growth fund that's like three and a half billion dollars or something. You know, we probably have 10 or 15 investment people or something on that compared to, let's call it, 85-plus that are on the kind of early stage side.

And that's a lot because, look, we get an enormous amount of leverage from our early stage teams, right? So we don't need to replicate all the domain expertise in every domain that we do because, you know, we have a great partnership with our early stage teams. So that is a much more highly leveraged opportunity to have a growth fund like that and have, you know, many fewer people who can obviously benefit from the infrastructure we have at the early stage.

No, the growth fund has the charter to be able to, you know, do anything that is basically at what we call growth stage, which is a highly nebulous term that doesn't really mean anything. But basically think of it as like the way we've affected it is mostly it means it's really hard in a multi-billion dollar fund to do stuff that's less than 50 or 75 million dollars of investment, and we can probably do up to like 350 or 400 million dollar investments. And in general, it's supposed to be where we're not really taking product market fit risk at this point. We really are saying, okay, great, we've got a company that's doing 10, 20, 30 million dollars. How can we help them get to 100 million or 250 million?

That's kind of generally a charter. Now, of course, we do some life sciences stuff, obviously, where there's exceptions to that, but in general, that's the charter. If you look historically over time, about 60% to two-thirds of what we do comes from inside the portfolio. So it's us having done Databricks at an early round, getting really excited about it and saying, hey, like we just want to keep doubling and tripling down on it. Or, you know, we've done, you know, Flock Safety as a company in the safety space. So we've done a lot of that, roughly about 60% to two-thirds of it.

The other stuff that we do that is technically outside the fund, outside the early stage, the honest answer is 90-plus percent of that is stuff that we have seen and tracked at some point in time, often through our early stage teams, that for whatever reason we didn't do, and maybe it was a mistake or maybe it was the right answer at the time to do it, and it's turned out it's broken out. But it's not, what we're not really typically doing is saying, hey, like let's go look under some rock here and there for some company that we've never heard of before that is whatever, some generational transition opportunity or something like that.

Most of what we do, we call it actually late-stage venture is what the name of the fund is, and it really is that, which is, look, it's venture-backed companies, most of which hopefully we have seen and tracked over time. And, you know, in that case, it's like, okay, we missed it for whatever reason at the early stage. We still think there's a significant appreciation opportunity. Let's now kind of be able to kind of, you know, invest alongside those founders.

It's a great question. So let me take a step back and just tell you why we did what we did, which is having looked at venture firms in our view for a long period of time, we think that scale often is the enemy of returns in venture capital firms, right? Okay, so it is, you know, often the case that as you increase AUM, you know, returns degrade. Now, therefore, there's a simplistic meme, which is, okay, like big funds are bad, small funds are good.

Our view of the world, and obviously time will tell whether we're right, is there's specific behaviors that happen in the organizational perspective of most firms that causes them to degrade as things scale. There's nothing like, there's no like law of nature that says like a big fund is bad. And our view is what happens typically in these firms is they keep too much stuff centralized is the very simple way to describe it. And what I mean by that is, okay, I'll take Andreessen Horowitz. Marc, Ben, and I have been there for a long time. Therefore, in the traditional venture structure, we would get elevated to like we should be the uber investment committee for all these other vehicles, and we're smarter, we're all-knowing, you know, so we should make all the decisions and everybody should have to come prostrate themselves in front of us and, you know, kind of tell us, you know, get our permission to do stuff.

And I'm exaggerating a little bit for effect, but there are some examples of that in firms. And so we think that degrades decision-making because what happens is people confuse seniority with domain expertise. And at the end of the day, particularly for early stage, our view is, look, like the only way you win in early stage is you have to have super deep domain expertise. So we're lucky to have a guy, Martin Casado, who runs our infrastructure side of our practice, and like his team and him and he are deep computer science experts who understand everything, who literally can do code reviews. They need to do code reviews.

And there's no way that I can go look at a deal they proposed to me at an investment committee and opine on whether they should do it or not. Like it's just not possible. Like they live and breathe, they know the 50 companies who are doing, you know, character-based AI, whatever they're doing, right? And like, you know, I can pretend I understand that from a memo they send me, but the reality is I don't. So our basic MO as the firm, as we said, look, the only way we think you can scale without degrading the firm is you have to get to massive specialization and you have to get to delegation of responsibility at the level where people who understand this stuff.

So as an example, we do not have an investment committee at the central firm. So there is no central investment committee. The only investment decisions are made at those individual fund levels. And if I'm participating at the level that I can add value, then I'd be part of it. But like I do a lot of stuff in the bio health side, so like I go to their investment committees and talk to Stu about them, but like I'm not a decision maker because like I just, I don't have the same level of expertise in the early stage as they do. So that's why we did it.

So to your question then about what you do now, the other thing to remember is, look, you asked about how the walls are. One of my partners, you know, David Haber, always says that kind of really interesting opportunities happen at the intersection of verticals, right? So, and we see this already, right? There are lots of intersections of financial services and crypto, or gaming and crypto, or even health and other, you know, applications, right? Consumerization of healthcare. So we have designed a model where basically everybody has compensation that is both tied to the particular vertical they're in, but then also they have exposure to everything else in the fund.

Rough way to think about it, two-thirds of your carry-based compensation is attached to your fund that you're primarily responsible with, and a third is attached to everything else in the firm. So we did that because we want to encourage people to kind of, you know, work across the aisle where they can. So I will finally answer your question, which is, look, if you are looking to get into a16z, I would hope, and I may be wrong, but I would hope that like everybody is incented to work as a team.

And so if you are in the wrong spot and you need to get like pushed over to another place, that's great. If you are in one of these intersections where both make sense, there are sometimes where partners from two funds will work on a deal, and you know, maybe you end up, we end up literally splitting the deal in terms of investments between funds. Sometimes we just put it in one fund, but we know we're going to tag team on it. We'll kind of figure out what makes sense. But I would say, as a general rule, it is good to get to the place in a firm where the partner who's evaluating your deal has the right specialization and focus.

I get a million inbounds all the time from people. In fact, you know, I know sometimes like you send me stuff, and my response is, great, thank you. I'm going to get this to the right person, and they're going to tell me whether it makes sense or not, because like for me to like try to opine on it, it's just a waste of everyone's time.

Yeah, so for us, look, we make it hard for people because we often use the name partner for everybody. That goes way back, and I won't bore you with the details on that one. But look, there's no question, as you all know in your organizations, right, there are some people who are ultimate decision makers, and there are some people who contribute to the making of a decision, right? But they may not ultimately, you know, kind of have definitive authority.

Look, venture capital firms are the same way. So yes, like we have our definition of a general partner is you can write a check and you can sit on a board. Like that is what a general partner means. But we do have, you know, we don't often use the words, but we have the equivalent of like principals and, you know, associates and analysts and all that other stuff. Like they are enormously, enormously valuable and impactful. Like I mean, I think of them as, look, they are a massive augmentation of everybody's eyes and ears about what's happening in the industry.

And so number one, like I would, and I would say the same thing to them, but like you should not not engage, at least at a16z, and I think this is true more generally, like you should not not engage with a partner or associate or somebody even though they're not the general partner on things. Like the reality is often stuff that shows up on the desk of a general partner often is sourced by an associate or an analyst. And then even if they didn't source it, like they are an enormous part in our firm of helping with diligence, and we want them to give us their point of view on stuff.

And there's no question there have been times where they've given us feedback on things where we're like, yeah, okay, we're going to do that or we're not going to do it based on feedback from that. We actually had a, we invested in Pinterest, luckily, at the Series B. And initially, the partner who was sponsoring it, Jeff Jordan, was not convinced of it. And at the time, we had a woman named Connie Chan who was not, she was not a GP at the time. She was actually, we didn't use the word, but she was effectively like an associate. And she like pounded the table on it and helped him understand it. And luckily for us, like we were not too stupid to listen to her at the end of the day, and we made the right decision.

But so I think it's really important. What is important, though, I think, is, look, like if you are working with a venture capital firm or you are pitching a venture capital firm, just like any other sales process, you have to understand the nature of that sales process, right? So it's just like when I'm calling on an LP, for example, I have to understand, okay, who are the decision makers? Who are the people who might be champions but can't be decision makers? Who actually has the budget? Like, what is the process? So, like, what do I have to do ultimately to get to a yes, or what are the gates or the milestones and stuff like that?

And so, look, I just think you should, I would never, like, ignore anybody in that process, but I do think it's also incumbent upon you to kind of have that conversation. And it's not a rude conversation. Just say, great, like, sounds like you and I are having a good conversation. Sounds like maybe you're interested. Like, what is the process? Like, what happens from here? Like, what do I need to do, you know, in order for you all to get to a decision? And I think it's a really important, it's a really important skill to have, period, as a CEO of a company, because everything you do effectively is an enterprise sales process. And I would just think of, you know, fundraising as, you know, pretty much that exact thing.