How Andreessen Horowitz Disrupted VC & What’s Coming Next

You know, I don't think I ever got that until just now.

Yeah. So, just a couple things. So, one is, I mean, just look, I'm just absolutely amazed and flabbergasted that venture capital even exists. And you know, my first whatever, 22 years of life, I had no idea. I never heard about it growing up. I never heard about it even in college at Illinois. And I came to Silicon Valley, and my first business partner, Jim Clark, was like, yeah, we start a company, we go raise money from these venture capitalists. And I was like, what's that? And he explained the thing. It just completely blew my mind that there were these people who were literally scouting for basically crazy startup entrepreneurs to start these things, and they would give you money when you had nothing. And I was like, wow, that's amazing. And so one is just the fact the field exists is amazing. And then look, the VCs, VC in its modern form kind of started in the 1960s. And I just look back at the history of these guys: Don Valentine and Tom Perkins and Pitch Johnson, you know, all these... was it Bill Draper, Arthur Rock, like, you know, these guys for me are like legends because, you know, the fact that they could go out and source a Bob Noyce to start Intel or Steve Jobs to start Apple or these things is just amazing. And then, you know, I'd also say, look, Ben, you know, I would say I had quite good experiences. Ben mentioned the issues with the field, but Ben and I had the chance to work with two VCs at the very top of their game when their firms were on top of the world, and that was John Doerr when he was at Kleiner Perkins in the '90s and was kind of the top VC, and then later Andy Rachleff, who was a founding partner at Benchmark when they were kind of on top of the world. And I think in general we got a lot of value from those guys and considered them partners and had very good relationships, and they helped us build, I think, good businesses. But basically over the years what happened was we kind of learned from those experiences, but also what happened over the years was Ben and I had become active angel investors and then sort of advisers and mentors to a new generation of founders, and this is in the 2000s, and then in the early... yeah, in the 2000s through the 2000s. And just so people understand the setting for this, after the dot-com crash in 2000, there had been an angel and venture boom in the late '90s, and then after the dot-com crash in 2000, almost all angel investing went away, and a large amount of VC went away. And it was like a full-on depression for early-stage tech. And so by like 2004, the crash sort of unspooled over five years. And by 2004, when Ben and I kind of ramped up our angel investing, like I think, I don't know, maybe the whole industry was down to like a half dozen angel investors or something. I mean, it was small. We knew all of them.

Well, so there was a famous moment. So this is a reference to... there was a famous moment when... so then basically, you know, tech started to take off again in the late 2000s, and then TechCrunch at the time, Michael Arrington had built up TechCrunch to be kind of the main online news source for startups and venture investing. And so Michael, one of his most remarkable things was he somehow cracked the code on... he was at some dinner and he somehow cracked the code that there was a back room at the dinner where like all of the... actually Ben and I were not there, but like most of the prominent angel investors of that era were basically sitting around this round table. And Michael Arrington kind of walks in and he's a journalist, and at least he described it as like there's these massively guilty looks on everybody's faces. And at least what Arrington... and Ben and I weren't there so I don't know what happened, but the accusation was that they were colluding, right? They were sort of all teaming up to try to see if they could keep valuations low, which is a no-no in business. But a significant thing about that maybe is that that actually meant that there were enough angels to actually fill the table, right? Because that was like when there were like a dozen of them as opposed to just a half dozen. And so yeah, anyway, so Ben and I just kind of started working with, you know, it would turn into dozens of founders, and what we ended up being very involved in because we had raised venture before and run companies, we ended up helping a lot of startups in that era raise venture. And so we helped them meet the venture firms and understand how to negotiate the deals. And then the other thing that happened was we would get called in when they would get sideways with their VCs, which happened kind of a lot. So this became, it turns out, this is one of the main things people were calling us on was like, "All right, I'm in some big fight with my VC, he wants some money back or this or that or he freaked out in the board meeting and what's going on and I hear rumors this firm is shutting down and he's going to fire my stock" or just like these crazy... or by the way, the VCs would call us up and they'd be like, "This founder is nuts and could you please talk to him and try to get him to do the right thing." So we ended up in this sort of arbitrator, you know, sort of coach-judge-arbitrator kind of mode, kind of helping patch these things up. And I think, Ben, for me, a big part of it was, you know, because you and I ran investing at that point, a big part of it was, well, hell, if we're going to end up doing that anyway, if we just showed up with the checkbook, we could kind of short-circuit the process.

Yeah. And it, you know, a lot of this, you know, comes from the fact that we, you know, since we had been running companies. And so, you know, if you're running a company, like it's a product company and it's in like full competitive battle with other companies and you're kind of going through the wars that companies go through, like you naturally think in terms of strategy, ambition, industry structure, the economics of the business, the competitive position, evolution over time, marketing strategy, unique selling proposition, differentiation. It's all these things that any business operator thinks about. And actually, to their massive credit, a lot of the original VCs who built the firms originally back in the '50s, '60s, '70s were actually operators, right? So Tom Perkins and Gene Kleiner had been operators, Don Valentine, Pierre Lamond had been operators, the founders of Greylock had been operators. And so, you know, it was very natural for the first generation to think in those terms. But by the time we entered the field, their successors for the most part had not run businesses. They had sort of grown up as professional investors. And so they just, you know, and they were inheriting businesses that other people had built. And so there was just this sort of fundamental difference in mindset, which is, you know, they were very... and by the way, the formula is working very well for them. They were very happy to, you know, the cliche goes, kind of sit on Sand Hill Road. And the deals we met with... I mean, I've got countless stories in this, but we met with one firm, Ben, you might remember, very prominent firm, and one of the partners said, he's like, venture capital is like so much fun as a business. He's like, venture capital is like being at the sushi boat restaurant, right? And so these are like the, you know, the sushi restaurants where there's like the sort of traffic, but the sushi there is typically not great.

Yeah. By the way, you know, one more story. So, you know, around the same time we met with another VC and, you know, like I said, we've been running companies. We've been dealing with investors and then we'd been running public companies. You know, Ben was the CEO of a public company. And so when you're running a public company, you know, you got investors, you've got your investor relations team, but like you've got hedge funds invested in your company and like when you meet with them, you don't even know if they're long or short your stock, often short in my case. Short. So like half the time you're giving them like ammunition that they're going to use to try to like go out and spear you and drive your stock price down. So it's just this like... it's just like absolute bedlam when you're running a company with shareholders. And so, you know, in venture it's different, or at least we thought it was different, because you have the... you know, your investors in the venture firm are in the funds are called limited partners, and these are these institutions like endowments and foundations and sovereigns and so forth that invest, and then they invest on these lockups. They invest on like these 10 or 15-year lockups, so they put the capital in and they really sit patiently and let you do your thing. And so we were just like, "Wow, dealing with an investor who's locked in to be long with your company for 15 years, like sounds like the best thing in the world. Like this sounds amazing. These are like super smart people running these endowments, people like David Swensen, others, and Anne Martin and all these people." And so we were like, "Wow, this is going to be..." And then we met with a very famous, prominent, longtime VC who said, he's like, he said, "Boys," he said, "the part of the job you're going to hate the most is dealing with the LPs." Because he said, like, you know, these people are like not, you know, they're not smart, they're not, you know, whatever. And he's like, the way that you do it is you treat your LPs like they're mushrooms. You put them in a cardboard box, you put the lid on the cardboard box, and you put the box under the bed and you don't take it out for two years. He literally said that, which was like... it was such an insane thing to hear. Because like we treated hedge funds that were shorting us better than that. But then, you know, look, when we went out, this was actually the thing that kind of made me know that we had made a good choice by starting the firm, is when we went out to visit the potential LPs, you know, when we're pitching them and so forth. No, look, they had very interesting things to say. They knew a lot about the industry and they kind of knew a lot about investing in general. You know, Dave Swensen, who Mark mentioned, kind of wrote the definitive book on like how endowments invest and so on. And then, you know, when they invested, they were so interested in us, which, you know, it's just a nice thing in life when anybody takes any interest in you. And they did. I mean, these LPs did like 30 or 35 reference calls on, you know, both me and Mark, on like every single one of them did. And they learned a lot about us. I mean, they really got deep on it. And funny, actually, one of the funny things about the firm is I think we're the only firm in Silicon Valley who has this. We have a two-person keyman thing where like, so normally if like, you know, as long as one person is intact, you know, the fund is, you know, there's no vote on the fund or whether the fund continues. But in fund one, they wanted it to be like both of us had to be there because they're like, "You guys are both flawed, but when you're together, the flaws go away." Like, they had gotten that deep on us, you know, and so it was kind of cool.

Mark initially recruited me and then said, "Hey, Ben, Erik, you guys figure out the details."

Yeah. So, you know, a lot of my thinking on this is from our friend Martin Gurri's book that he wrote back in 2015 called, I think it's called "The Revolt of the Public and the Crisis of Authority in the New Millennium." And so basically it's like the world really did change, like how information flows through the world really did change, not just with the arrival of the internet, but specifically with the arrival of social media. And so, you know, it just so happens that like all of us who grew up over the last 70 or 80 years, like we grew up in an environment of primarily top-down media, you know, in which there's, you know, these sort of major forces in, you know, broadcast, you know, TV or cable TV or newspapers and magazines where, you know, editors and publishers and reporters and they sort of write all the stories and then, you know, it's everybody else's job to kind of read them and keep up, you know, to a world that looks, you know, completely different, whereas it's basically everything is peer-to-peer. And so, you know, hierarchy to network, and then centralized institution to, you know, decentralized network. And, you know, that's happening throughout the economy and throughout, you know, throughout society. And, you know, there's good and there's bad to it and there's, you know, tons of arguments to be had about it, but it is happening. And so just, you know, in the new world, it's just you're not... if you're running a business or running a movement, like you're just not going to do it through the traditional method. You may still participate to some extent, but you're going to primarily tell your own story and you're going to go direct and you're going to have your own relationship with your constituents or with your fans or with your customers. And, you know, like in some sense that sounds... it all sounds like a truism and a cliche, but like I think there were a couple of tipping points where it really started to happen. And one was around 2015 because social networking kind of hit mainstream and smartphones hit mainstream around that time, which was when Martin wrote his book. But then I think really it's only been in the last five years when I think almost everybody, like let's say basically everybody under the age of 70 and a very large number of people over the age of 70, basically have shifted from top-down media as their main source of information to social media as their main source of information. And so it actually is relatively new to live in this world in which the information really does flow differently. And so like it's just a fundamental shift. And so I think, you know, as a firm, we spent, you know, as Ben said, we always had a big focus on marketing and telling a story. We, you know, we did that primarily through the old centralized channels from 2009 to, you know, probably 2017 or something. You know, but really since then it's been, you know, at least as effective or more effective to kind of do it the new way. And, you know, it's like the old William Gibson thing was like the future is already here, it just isn't evenly distributed yet. Like everything I'm saying people can like nod at, but like, you know, as you know, Erik, like most companies have still not adjusted to this, right? Most politicians have still not adjusted to this, most entertainers have still not adjusted to this, most sports leagues have still not adjusted to this. And so I think it's very important that we continue to do it, and then I think it's also important that we set an example for our portfolio companies.

Yeah. So rewind history a little bit. So it's actually pretty striking, like this sort of decentralized media environment that we're entering is not new. It's actually very old. And correspondingly, the centralized media environment we all grew up in is not the historical norm. And so basically the way that we think about centralized top-down media today is basically an artifact of basically the period of the 1940s through, you know, essentially the 1970s. Like before the 1940s, you didn't have top-down media in the same way. If you go back to the 1930s or before, you had a much larger number of newspapers, you had a much larger number of radio stations, you had a much larger number of sort of fly-by-night publishing operations, you know, pamphlets and so forth. And then if you go back even further, one of the most interesting things to study on this is just go back to the American Revolution, you know, the time of the colonies in the 1760s through like the 1790s. And it basically... I've been rereading some of this stuff recently. Like basically the media environment of the colonial American era was a lot like today's social media environment. You would have 15, 20, 30 little newspapers per city. They would be in like... they would occupy every micro-slice niche. You talk about echo chambers or whatever, like they each have their own little echo chamber. You know, the founding fathers would write all these columns and essays. They would fight things out by writing essays and then they would publish the essays under pseudonyms. And you'd have these characters like Benjamin Franklin or Alexander Hamilton that would literally have like a dozen or two dozen pseudonyms at a time. They'd actually write... they'd actually get in fights with themselves. They'd actually... they'd have their pseudonyms actually fight with each other. Ben Franklin used to set off arguments against his different pseudonyms to drive, you know, to really like litigate out an issue and to drive newspaper sales. But like really serious stuff also, like the Federalist Papers, which were kind of the explanation of the new constitution in 1789, Hamilton and Madison wrote those under pseudonyms, right? And so this idea of like the internet is like... that's an old idea, and the idea of a pseudonym is an old idea, and the idea of like self-publishing is an old idea, and the idea of like basically these smash-mouth battles, you know, with very little centralized control over what people say. Like, you know, if you read about like how, you know, like Hamilton and Jefferson, and then also Jefferson and Adams had these just like absolutely... they had their own basically pet newspapers and it was just like absolute level of smash-mouth politics. Like I would say even more like extreme and deranged than even what we have today, which people kind of can't believe, but like if you read about the election of 1800, like it was maybe I think it was more extreme than certainly any election in my lifetime in terms of like what, you know, it's literally John Adams and Thomas Jefferson like just like slandering each other. Polarization is the norm, like really like on every conceivable front.

Yeah. So like polar... you know, sort of as our, as they say, unfettered conversations were the norm. Anonymity was the norm. You know, rumor, you know, scurrilous accusations were the norm. You know, the Overton window being wide open was the norm. And so, and just for people who want to read about this, the best book on this is called "Infamous Scribblers," which was sort of the name for journalists in those days. And so like, you know, this has happened before. And so anyway, so the point is like this sort of centralized media thing that we've been living in, that we grew up in, or, you know, people my age grew up in, like it's a historical aberration off the norm. And again, it's a consequence of technology change. It's a...

consequence of this sort of mass publishing, mass media, mass radio, mass television, mass newspaper kind of thing that only started in the 1940s. And then correspondingly, therefore, you know, Eric, to your question, like everything that we think of as corporate branding is an artifact of just a specific point in time, of the sort of 1940s through, call it, the 1980s or something like that. All of like brand marketing, corporate brands, corporate messaging, corporate crisis management, like all these playbooks that they teach at business school were very specific to a time and place that had a very small number of centralized media outlets with tremendous influence and control. Um, but, but, but, and, and therefore the corporate brand, like why does the corporate brand exist? Like why does a Procter and Gamble brand or any of these brands exist? It exists because if you have centralized media, you know, information is going through this very narrow straw, right? There, there, there's very little bandwidth to get something on a TV or very little bandwidth to get something in the newspaper, and therefore to get it to consumer's attention. And so you kind of had to wrap up everything about a company into like a single word and a single image, and then you would just, through advertising, you would just pound that over and over and over again, trying to get people to remember it. But that, but that's because that's all you could do. If you, if you open everything up and everybody can publish and everybody can debate and everybody can be present and everybody can, you know, and then you have these, you know, individual, you know, influencers, you know, with 200 million followers and all, all this stuff, like all of a sudden you have this completely different method of communicating with an audience that can be much more based on personality, right? So authenticity, transparency, and then, and then personality, right? That, that there can actually be a human being. Um, and then it just, and it just happens like because your audience always consists of people, people relate much more to other people than they relate to a corporation, right? Um, and so as, as an individual, am I going to feel a stronger emotional affinity, affinity to like a person who I follow or to some like disembodied corporation with an office tower in New York City? And if, if the communication bandwidth is there where I can interact with both of them, of course, I'm going to have a lot more affinity for the people. Um, and so I, I think I, I'm sort of a radical in this. I think the whole idea of like corporate brands is basically just like it, it just, it kind of, they're on their way out. Like it's just as, as a concept, it just doesn't make sense in the new media environment. And then correspondingly, this, you know, this, the terms people use these days like influencer marketing and so forth, but the, the parasocial relationship is actually really, really interesting one. Um, you know, sort of one-to-many personal relationships. Um, you know, I just think so much of how it's going to work in the future is this is based, this is based on, it's based on relationships with individuals. And obviously, you know, look, this is happening, right? Everything I'm describing is, is what's happening in, in the entertainment industry, and it's happening, you know, consumer brands, and you've got, you know, Kim Kardashian with these, you know, with these multi-billion-dollar businesses, you know, doing, being direct marketed online. You, you know, many people doing this. Many politicians, you know, are now adapting to this. And so this is happening, but I just, I still feel like it's, it's, it's underestimated. And if we project forward 10 years, um, you know, most people, most people are going to think about, most people are going to think about the people they relate to as opposed to the companies they relate to.

Yeah, that's right. People kind of can't believe it, but like before like 1930, like, number, either, you like literally you would just go to the store or it was just like the corner store and then you would buy like, you know, a pan and they weren't branded, like, you know, maybe, or maybe it was like Joe's store, but it wasn't like, it wasn't like a, you know, and so like the, the, the, like consumer brands didn't exist in the modern sense. And then to Ben's point, like to the extent you knew any, any business that was, uh, at scale, it was, you know, and businesses, you know, prior to like 1930, they were almost all named after their founders, you know, kind of for that reason, right? It was the Ford Motor Company. Um, and so, and then it was actually this, you know, there's this whole school of psychology, actually I think it was, uh, Freud's son-in-law, if I remember correctly, Edward Bernay, who was sort of the father of public relations, you know, was the new field in the 1920s when, when radio and newspapers took off and, uh, centralized kind of media started to take off. Um, and, you know, they sort of created this whole psychological theory of, of, of creating these sort of abstract brands for the, for the reasons that I, I described. But, um, you know, by the way, which is very linked to the, although the methods also political propaganda, you know, that became, you know, kind of very successful, you know, in those days. But it's just, it, it, it, it is amazing to me as it's like, you know, there were hundreds of years before, there were hundreds of years of industrialization before that and modern, modern economic activity before that where those things, you know, essentially didn't exist. Um, and, and, and that's why I'm, I'm so confident in, in sort of pegging all this to technology shifts, which is that, you know, the thing that shifted, the thing that shifted how we think about companies happened as a consequence of the shifts in communication technology. And then correspondingly, if the communication technology unwinds, which is what's happening, um, then you're actually going to go back to the future. Um, and yeah, and then of course there's, there's more data place to support that every day.

That is also true. Yeah. No, it worked. It did tie us to the firm. So, yes. Yeah.