"This feels like 1996": Why a16z's Martin Casado believes the AI boom still has years to run

If you asked me what is the one area that AI has surprised you, it's in coding. I've been developing my whole life and I would never have guessed it'd be this good.

No, I think that could come. The current technology wave is you can actually deploy capital and you can get revenue on the other side of it. And I think that is what the market is trying to normalize. But there's a true value being created in this AI. And I think that if money is not following it, it's going to miss the greatest super cycle in the last 20 years.

I used to think from company out. I've stopped that. Now I think only from markets in. The reality is the market creates the company in most cases, not the other way round. And so I always start with what is the market? And then I ask the question, is this the right founder for this market? It's clearly not perfect. And in fact, you'll be wrong a lot of the time, but I would submit that if you invest in this way, you will be right in a way that's better than market norm.

Actually, it was Department of Energy. So I worked at Lawrence Livermore National Lab. So actually, I'm going to rewind it like just a couple of years. So, I actually paid for a lot of undergrad writing game engines for video games. So, that was kind of like, you know, so back in like the '90s, you only really got into computers if you wanted to hack or make video games. Like that was it. I mean, it like wasn't what it is now. And I kind of took the video game route. And so I did like a lot of, you know, game development. And in college, I did a lot of engine development. And so what I was interested in was things like 3D engines and game physics and game mechanics. And that pushed me towards computational physics like simulation. I mean so the game industry is a very tough industry to do and I was actually quite interested in science and I was quite interested in physics and so that pushed me towards the national labs and so yeah so my first job was doing basically computational physics working on these large simulations at Lawrence Livermore National Labs and I started interning in like '97-'98 time frame and then I took a full-time role in 2000.

This is so funny. So, I worked with a company that probably doesn't exist anymore, but I worked with a contract outfit called Creative Carnage, and they worked with the budget division of I think it was either Acclaim or Accolade, and it was called Head Games. And I think we have the great distinction of having had the games with the lowest ever score on PC Gamer. So they would do games like Extreme Paintbrawl, a mountain biking game, a skydiving game. And so this is like the very early days of 3D engines and we didn't quite understand the game mechanics. And so it was like a super budget game shop, but these weren't games that you could go to Walmart and buy. I mean, they were very legitimate games. And so that was kind of my shady entree into this.

Exactly. Yeah. Yeah. Yeah. Budget games. Yeah.

So, I've never been a big gamer as far as playing games, but I've always loved creating games, and I still do. That's what I do in evenings now. So, I love music. I love narratives. I love programming, and I love games. And so, actually, if you track some of the... I mean, this is like not great work. This is all hobby work, but you know, I worked with Yoko on AI Town. I've recreated a bunch of old 8-bit games using AI. And so it's actually still like a big passion of mine, but again, I'm not a big gamer. I don't like sit down and play games.

By the way, AI makes it a lot easier. I would almost certainly not be programming like I do now if it wasn't for AI, for sure.

Yeah, so I actually didn't drop out. I finished my PhD. So I think it was kind of funny. So the adage at the time was the only way to be a successful founder is you have to drop out of your PhD, right? Because you know Sergey and Larry Page were in the floor above where I was in Gates and almost all of the successful founders at the time were PhD dropouts where I had actually completed. So no, I actually didn't plan to be a founder. I actually had a faculty offer at Cornell at the time and we're talking 2007 now. So my plan was, you know, I did this PhD work. I had done a startup previously. It was a very small thing. It was called InfiniCon Systems, which, you know, instead of raising money, we ended up selling it. And so I liked being a founder, but I thought this was kind of like... I was so naive. I was so naive. I thought this is something that, you know, you could just start a company and do it for a couple of years and then sell it and go do something else. But, you know, I started the company in 2007 and then 2008 hit and that was a hell of a reality check because...

You know, this fork in the road, like do you do this company in, you know, the worst economic environment since the Great Depression or do I go be an academic? And you know, it forced me to really decide what I wanted to do and I decided to do the company.

It was so hard. I mean it sounds daunting given the environment but you know in your spirit... it was so hard because you know, I mean especially because, you know, I mean this is when Sequoia had released their slide deck, Rest in Peace, Good Times. Everybody was, you know, riffing their companies. I mean the economy was tanking so it was very, very tough. And part of it was honestly just responsibility. I was just like, I convinced all my friends to join the company and I would feel like such an idiot if I just like left. That was part of it. And another part of it is I just felt like there was work to be done that I hadn't finished. And I'm just of the temperament that if I start something and I don't finish it, it'll bug me forever. And so I kind of didn't want to face myself in 10 years. But I'll tell you when I made the decision, I called my mom and she said, 'Martin, you're an idiot.' So for what it's worth, I was pretty alone in the decision.

Yeah, it worked out. Yeah.

Yeah. So, you know, I learned easily as much at VMware as I did in a startup and it was a phenomenal experience and, you know, it's one thing to do a startup and, you know, to do early founder sales and to build a team, it's an entirely different thing to get a business to a billion globally with all the partners and especially within a large organization where, you know, you're overlaying with kind of an existing core team and other product teams, etc. I mean, it was a great experience but one thing that's important to remember is, you know, I started the research for this in probably 2005 and 2006, right? And so by the time, you know, I was at VMware for three years, it had already been 10 years. So we got acquired by 2012, so it had already been 10 to 11 years that I've been working on exactly the same thing. And so I've just found that my career goes in kind of decade epochs, right? So in my 20s, I was writing papers, writing code, engineering, you know, a poorly dressed PhD student that knew nothing about business and nothing about anything. And it really was that's what I did. I mean, I wrote a lot of papers. I built a lot of systems and I love that. And then in my 30s basically almost to the day, I mean it was this journey which is like, you know, building products, building a business, building a team and doing that globally. And I did think to myself like, you know, I'm so enamored with technology and I'm so enamored with startups and I love innovation. You know, you ask yourself, okay, so what do you do next, right? And I like being close to like where things are being created and so that means that you get involved in the startup ecosystem. But do I want to spend another 10 years doing a journey that I've already done or do I want to zoom up one more level? And so I almost feel like my 20s, it was like the abstraction was, you know, a product or lines of code and then I zoomed out a little bit, then the abstraction was one company and then when you join a firm you zoom out a little bit more and then the abstraction is a company and you actually see the experiment in parallel. And I will tell you like from this vantage point, even though I had done two companies, I learned so much more than I ever would have if I would have done another company. So for me it was the right decision.

I will never... Listen, I had a small taste of politics last year when I thought that there was nobody defending AI from a policy standpoint. Never realized... I will never, ever, ever, ever go into politics. Man, as far as I can tell, everybody just lies to each other all the time. It is not for me.

Yeah, it's kind of a funny... it's actually not a super public story. It's kind of a funny story. So Mark and Ben invested in Nicira as angel investors. You know, this is before the fund existed to begin with. And actually the way that I met Ben was Andy Rachleff was on my board. So Andy Rachleff is the famous Benchmark partner. You know, he was a professor at Stanford. And I was looking for a CEO because, you know, I was a very, you know, technical CTO kind of co-founder. I didn't know anything about enterprise sales. And he's like, you know, I know this guy. He's just coming out of HP, sold the company. His name is Ben Horowitz. And so I actually met Ben Horowitz to interview him for a CEO. And you know what he told me? He said, 'I'm too rich.'

No, he was... I mean, he was so great. I actually learned more from him in that 45-minute meeting than any other advisor I'd talked to up to that point, which had been years. I mean, it was the most eye-opening thing ever. And so, he said, 'Listen, we'd love to angel invest. Mark and I are trying to figure out what we're going to do.' They did some angel investing. And when they started the firm, then we went and pitched and we raised... I mean, at the time we called it a Series B, but it was really a Series A from them. And so, you know, we kind of had like a history before Ben joined the board. And so, you know, listen, I built the company under his guidance. He was very critical to basically every aspect of it. And so when I was thinking about what to do next, I actually reached out to Mark. And I actually felt it would be better to reach out to Mark because like Ben was on my board and so like that relationship is, you know, it's kind of like your PhD advisor, you're never not their student. And you know, I think like with a board member you're never not like the founder that they work for. And I said, 'Hey, listen, Mark, you know, I'm interested in the next steps.' And one thing people, I think, don't appreciate about Mark and Ben is how good of operators they are. And so they took it very seriously. They themselves managed the conversation. I mean, I was still really trying to figure out the next thing to do and Mark was really texting me every single day. You know, they brought me in. I mean, like the close process that these guys run is just absolutely world class. And of course, I knew them very well. So, it's not like that would have really been necessary, but you know, they knew what they wanted. They had an opening for infrastructure. We had a long relationship, you know, and so, in fairness, I didn't even really talk to anybody else, you know. I mean, there was some kind of very early conversations, but I knew that, you know, that's where I wanted to land. And so, it was kind of a mutual process that was pretty streamlined.

Yeah. Yeah. Yeah. Yeah. A bunch of them. I mean, one of them is, you know, I was talking about pricing. By the way, anybody who works with me is going to realize that like half of what I say I just steal from Ben because I say what I'm about to tell you. I tell people all the time, but it's so true. And so I was asking a question about pricing and he says, 'I just want you to know this is the single most important decision you'll make in the history of the company, one decision. And really for your net worth as a human being, this is the most important decision.' And let me describe why. Well, you know, you own a bunch of the company, the valuation of the company is going to come down to growth and margins. Growth and margins. The single most important decision on what impacts that is going to be pricing. And so everybody views pricing totally glibly or they kind of make it up or they're at hawk, but they don't understand how important that single decision is towards, you know, the health and ultimate valuation of the business.' And then he actually broke all of that down. And at the time software was going through a pricing change like it is today. So it was going from kind of on-prem perpetual to recurring. And this had massive impacts in how you comp your sales team, had massive impacts on how you do go-to-market, and massive impacts on what numbers meant to be a healthy business. And so he just walked through all of that from this very single discussion. And just so you know, like we're seeing the same shift now as we go from basically recurring license to usage-based billings. And so even, you know, this conversation I had in 2009 is still relevant today and I draw from it. So I think this is a good example of, you know, this deep insight that he was able to portray from his operational knowledge.

Oh yeah, it's totally different. I think I was the ninth general partner. You may want to take that as the ninth. And when I joined, probably 70 people at the firm. On Mondays, we could all sit around the same table. Everybody was kind of a generalist, you know, we didn't have a notion of a more senior investor below the GP ranks. Like we didn't have any sort of progression ladder. It was actually a specific tenet of the firm that you'd have, you know, relatively junior, we'd call them deal partners, DPs, and they would only stay for two to four years. And the idea was that like, you know, you get more network that comes, then, you know, they're quite relevant, and then also you kind of spread the A16Z network as they go join other firms.

So it was very, very different. So now all of that's different, right? Like GPs are specialized. We have multiple funds, you know, we have a clear progression ladder of investing partners. We're, you know, 600-some people, maybe more. You know, we invest at all sorts of different levels. There's a lot of process and methodology. And so I would say the primary motivator for all of the change is the question, how do you scale venture capital?

You know, in some ways, and I've said this before, so, you know, it's kind of this historical quirk that venture capital firms have the same partner model as like a legal firm or a dentist office or a doctor's office, which is this partnership model where everybody's kind of equal, etc. And it made sense when the market was a thousandth the size. It's like if you think about it, like when we created venture capital firms, the market was so small, but it's grown now and it's professionalized, it's matured a lot. And so now firms have to answer the question, so how do you scale deploying money? How do you scale AUM? How do you scale decisions? How do you deal with conflicts, etc. And so that's been the prime motivator that has changed many of the shifts that we've made at A16Z.

So the roughest cut is if the buyer or user is technical, it is infrastructure. So it is the stuff to build the stuff, like apps are built on infrastructure now. And in particular, it's computer science infrastructure, right? So like you could say infrastructure is like, you know, construction and rebar and concrete. This is computer science infrastructure used to build software. And so it's the traditional compute, network, storage, security, dev tools, frameworks, etc., etc., etc. Now if there's a piece of software and the user or the buyer is in marketing or in sales or in a flooring shop or in a veterinarian, that's not us. That's apps. For us, all of the consumers, whether they're an admin type, a developer, that's infrastructure.

So I think actually the bigger priority for hiring on our team is actually product experience, especially in an infrastructure enterprise, and less pure technical prowess. Like nearly everybody on the team has either built a company or run a product team. There's very few that were like low-level engineer, you know, or low-level researcher. And so I would say that is the primary focus. And the reason is because we invest somewhere between the seed, you know, let's call it like an early C. And often you can't judge a company purely by financial metrics, but often there's enough to evaluate. So it isn't just a bet on the founder. And so what are you left with if that's the case? What you're left with is market understanding. And I just think it's very tough to do market understanding in infrastructure if you don't have a product background, which by the way is way more important than the technical background. If you don't have a product background, you can't evaluate the market. And then if you know in infrastructure, if you don't have some technical basis, I don't even think you can like have the conversations that are important. And then of course to map any given company to that market, you have to have also that same understanding.

I think it's a great point about... listen, I think some of the best infrastructure investors ever were not classically technical. Like Mike Vopel is phenomenal, Doug Leone is phenomenal, Fenton is phenomenal. These are the greats. And I think that a lot of this is because we've had almost a generational shift in the industry where before it was such an obscure knowledge, understanding the people and the networks and where they came from was critically important. I think now it's matured to the point that you actually can take a bit more of a systemic knowledge based on the fundamentals in the industry rather than those. And so I think this is more of a testament to the maturity and the size of the market than us as investors. And I will also say many of the top investors right now in infrastructure are non-technical and they're phenomenal, right? There's many great folks out there. So this is just our approach. It's definitely not the only approach to being successful.

So I've kind of decided I just need to remove... we as investors need to remove ourselves from predicting the future, which is a funny thing because we're supposed to be predicting the future. I think that's a mistake. And so our approach is very straightforward. We believe that the founder network, the founders themselves are smarter than customers. They see the future, not us. They're definitely smarter than investors. And so if there are three or four very good founders that are working on a space, we just assume that space is good because A, they're founders, B, they're doing the opportunity cost of doing it. You know, they're risking their time, you know, their family's wealth in order to do this. And so to first order, we just say, okay, what are interesting spaces? And there's, you know, there's a whole methodology we use to do that. And if there's an interesting space, the next question we ask is, who is the leader in that space? And is it too early to determine? And if it's too early, we wait. And if we determine that one we think is the leader, then we try and make the investment. The thing about this approach is, I mean, it kind of removes us from, you know, like there's so many aphorisms on investing, like this is a great founder and the founder has grit and, you know, like all of these things. But at the end of the day, all of that you have to kind of filter through yourself and your team and we're all very biased and none of it you can systematize. Where if you're simply asking the question, A, is this a legit space and B, is this the best company in the space, this is something you could actually throw work on. And it's clearly not perfect and in fact you'll be wrong a lot of the time. But I would submit that if you invest in this way, you will be right in a way that's better than market norm.

This is a great question. So if there's one thing that has shifted in me about how I think about investing and how I think about companies is I used to think from company out, right? So I'll look at the company, I'm like, the founder is great, the product is great, the technology is great, the go-to-market is great. I've stopped that. Now I think only from markets in. The reality is the market creates the company in most cases, not the other way round. And so I always start with like, what is the market? And then I ask the question, is this the right founder for this market? The answer to your question of like, is this a great founder or not founder, I don't think that there's a single answer. It strongly, strongly depends on what they're setting out to do. Now, I do weight a lot of things. I do weight things like earned knowledge, like have you earned the knowledge to be in this market based on your experiences in the past? Like were you at the bowels of Uber building out their storage system and now you bring it to the rest of the world? You know, I'm a very product-focused investor and so I just tend to resonate with product-focused founders that see the world in terms of what is the product we're going to create and how am I going to insert that into the market as opposed to pure technologists which don't care about that and pure salespeople which also don't care about that. Right? So I'm a very product-focused CEO. But I will say that my umbrella answer, my macro answer to you is almost all questions I ask about companies actually stem from the market I'm in.

Yeah. Yeah. Yeah. That's... I mean, that's the part of the job where it's an underdetermined system, right? There's way more variables than equations and we just do our best. And our analysis is multifarious, right? Like I know like as investors and probably fueled by things like X, we like to reduce VC to like, here are these five things, here's our basic thesis. And, you know, the reality is most investment decisions take a lot of work. You consider an awful lot of things and then at the very end you kind of look at it and you make a judgment on that. So what are the things we look at? Like I mentioned, founder-market fit is very important. Tactical approach is very important. The market itself to me is incredibly important. Like I've just learned that if you're selling into a market that's shrinking, life sucks. Even if it's a huge market, even if it's a huge, huge market, let's say like switching and routing is this huge market, but if it's only growing 3% or it's flat or it's shrinking, you know, you're dealing with budgets that are contracting, people that are losing their jobs, like all of the incumbents are going to be fighting for their lives. It's just, you know, so I'm very sensitive to markets that are growing versus shrinking, you know, ability to hire, ability to fundraise. I mean, all of these things go... I mean, the final memos for investments tend to be fairly comprehensive. And so all of this also necessarily requires us to do a lot of work before companies are fundraising. And so like there's a kind of a necessary part of this motion which is you're constantly trying to like enumerate the companies that are out there and then doing the analysis to determine, you know, who is, you know, in the lead and who is not. And then you're right, at the end of the day, you just kind of be like, 'Ah, okay. I mean, we did all of this work and we think that you can make this argument here.' And we get it wrong a lot, right? There's nobody can predict the future.

Yeah. 100%. I mean, you know, you just have to be comfortable knowing that even if a company looks like the leader now, anything can happen. Like they could get acquired the next day for an acqui-hire that they decide to do. A new company can show up that didn't exist before, you know, anything could happen, there could be a platform shift, etc. So the entire goal is, can you over a set of investments, you know, beat, you know, the upper quartile of the other venture capital firms? That is the goal and you take the losses along the way.

I'll make a stronger form to say I think Hock Tan may be the best, outside of maybe Jensen and a handful of others. He may be the best CEO the industry has ever seen in infrastructure. He's just unbelievable. You know, somebody should do like the Hock Tan book or overview or portfolio or, you know, focus piece or whatever. The employee retention is unbelievable. He's managed to do these incredibly complex acquisitions. And I will say, so, you know, normally when you buy a company, any company at all, like the team that you integrate the acquiring, the acquired company into, you know, you've got all these kind of lawyers and corp dev and biz dev and HR people running around. You've got this entire committee for integration. You know, when Hock Tan acquires a company, even something like the size of like a VMware, like the committee is Hock Tan. The integration committee is... I mean, the guy is just legendary on like how hard he works, how he runs his meetings. He knows everything about his business. He knows all of the numbers. And what's interesting, he's a business guy. He's not a technologist nor a product guy, you know. But, you know, he has now, he's stayed away from the limelight and, you know, to his credit, like, you know, he just focuses on the business. But there's a lot we can all learn from what he has done and what he's going to do. I really do think he is, he's probably the most iconic CEO right now.

Well, I think it just managed to piss everybody off. I think there was like every constituency found a reason to hate it, right? And so...

Yeah, that's right. It's like the mother of all Rorschach tests, right? And, you know, I think for, you know, there's this sense outside of VC that VCs are just pattern matching and add no value. And so for those people it was a confirmation and so they're like, 'Oh, I know it, VC is just consensus,' you know, and now Martin is just acknowledging it, which I totally wasn't, but we can get into that. And then for the investors it was like an attack on their originality, which was like, 'I don't do that, I'm a consensus...' like, you know, you had many junior investors who don't know what they're talking about that they kind of said a bunch of random stuff, but you had some very senior investors that were like, 'Oh, I do all these non-consensus bets,' and like whatever, whatever. So everybody found like some reason to take umbrage. By the way, which was like, I hadn't even thought deeply about the tweet because this fairly innocuous thing I thought was just so obvious. I was like, I'll say some obvious thing on a Sunday morning and it just turns out to have been a lightning rod.

Well, I work with a large team of investors and I'm often in the position of providing guidance. And if you're not considering follow-on capital, then you're not fully evaluating the opportunity set. And I've found that the cliche VC aphorism rule book is like everything must be alpha and this and that. So I just thought there's plenty of people talking about, you know, finding the diamond in the rough. There's plenty of people that are talking about finding the white space, but like there's this another side to it that isn't as represented, which is as you go later and later stages, VCs become more and more consensus driven, and that's exactly because they're putting more money in and they need more predictability. It follows naturally out of the system. So in a way, this is the most banal tweet you could ever imagine. It's just, it's actually totally obvious. I'm not saying I can sense the best. I've done tons of non-consensus stuff. I'm just saying that if you don't consider this, it's dangerous. And so often we don't talk about that. So that was the genesis, which is a totally banal tweet from a very obvious place.

I just feel like, I mean, I feel like X is like, it's just totally chaotic, right? There's some tweets I'm like, this is so deep and pithy and like nobody ignores it. Another one is like this kind of pointless thing. And so in a way again, you know, just like looking at the market as opposed to the company, I think that like tweets are much more indicative of the people receiving it than the person actually tweeting it.