Ben Horowitz from a16z on Venture Capital Systems, Network Effects, and Culture in the AI Era

Thank you.

Yeah, Lionel Richie made a good documentary on it if you're interested.

Yeah, yeah, yeah. Triple OG. Yeah, yeah.

And I... Great great human being.

Yeah, well that was the thing he could do. He was the best at handling super talented, difficult to handle people of all times, no question.

Yep. There's a moment in the documentary where the camera's following Quincy around and he's walking into the studio where the musicians all are and he points to the top of the door and he says, 'Read that.' And there's a sign above the door that he's scrawled on a piece of paper and he's stuck up there. This is at like around midnight when the recording session's supposed to start. And it says, 'Check your ego at the door.' I think it says, 'Leave your ego at the door.' 'Leave your ego at the door.' Sorry. Yeah.

That's a lot. That's a high bar. Yeah, yeah, yeah. That's hard to take that credit. He is amazing, yeah.

I... You're not supposed to be blushing this hard, Ben. I don't know. I mean, Quincy. Yeah, yeah, yeah. Having known him, he's a very high bar.

Yeah, so you know, we started the firm back in 2009 and at that time there were a couple of ideas about venture capital that I would say we thought were dated. One was like it was mostly an investment idea. So, the product for investors, LPs, was really good in that they had very high returns, but the product for entrepreneurs, I thought was like pretty bad in that they didn't do much for you other than give you money. So, that was kind of idea one that we thought we could just build a better product for entrepreneurs. And then the other idea that was very prevalent in venture capital was this idea that, you know, in any given year, and the historical data really supported this, there would only be 15 technology companies that would ever get to $100 million in revenue. So, the whole industry was just about getting invested in, you know, as many of those 15 as you could. And that kind of just limited the size of the whole industry and the capital in the game. And we really thought that was going to change because, you know, like at that time we thought if software was going to eat the world and every company that was going to be interesting, every new company was going to be a technology company and therefore there were going to be more like 200 companies a year that would hit that bar, not 15. And so we decided... one of the things that I did as kind of the CEO of the operation was to say, 'Okay, how do you scale this?' Because venture capital firms kind of notoriously didn't scale because they didn't have to. You know, it was... I remember Dave Swenson, who was the most famous LP, said, 'Yeah, a good venture capital firm is like the size of a basketball team, you know, five guys and then a sixth man or something like that.' And that was not going to be enough to have a great product for entrepreneurs and then also invest in, you know, such a large number of companies. And so, you know, to get to scale there were a couple of ideas that we had that, you know, sound very simple, but ended up being important. The first was normally in venture capital it's a partnership and the partners share economics and control. And the problem with that idea, and you experienced this in your career at other venture capital firms, is if you share control, then it becomes very difficult to change the organization because everybody's got to agree. And if you know anything about running an organization, the one thing about a reorg is some people are going to hate it because it's a redistribution of power. And it's not necessarily the people who aren't good, it's just like some people are just going to hate it because nobody likes to lose power. And if people get a vote, then there's no way to effectively reorg a business. And so our idea was like you can't share control. We'll share economics, but we'll centralize control. And that ended up enabling us to reorganize and enabling us to get into many more kind of categories like American Dynamism or crypto or bio or these kinds of things because we could change the organization and scale it and so forth. And you know, that ended up being an important kind of systems idea. And then we also kind of decon... because investing is always a conversation and you need a very high fidelity conversation to get to the truth. You never want more people in the room than can have a conversation.

Yeah, I think that like if you have really good chemistry and rapport, it can be like seven. But if you don't, then even that gets problematic. But yeah, you just can't do it with a large group. And so what we ended up doing is we just kept kind of splitting the firm into smaller and smaller groups over time. And each group would address a certain part of the market. And that, you know, that ended up being very effective.

300 million.

Well, succeed. I mean, like that's all it is. Like I think one thing, you think another thing. We're going to find out if I'm right. So, the first thing that happened was we invested like a quarter of that 300 million-dollar fund into the Skype buyout, which everybody thought was insane. But, like we knew there was a bunch of things we knew that other people didn't know. So, the first thing that made it insane was like the deal itself, eBay didn't own the IP. They owned the company but not the IP, which how they ended up there is like a crazy dumb story. But, by the way, never do that. Never buy the company without buying the IP. So, the founders kind of had this hold on them where they could have sued them and shut down the service. And so, everybody was like, 'Oh, that's an unbuyable asset.' But, like we knew the founders, Janus and Niklas, and we knew like the one thing they had in life that defined them was Skype. So, they weren't going to shut that thing down. It was just a matter of like how much money did they want. How did they want to be on the board like to come...

It wasn't the client. It was the underlying kind of library that controlled the protocol.

The communications part. Yeah, which was, you know, very hard to replace and all that kind of thing. So anyway, we bought it and everybody goes, 'Okay. Well, even though we thought you were nuts, like maybe you're not completely insane.'

Yeah, I mean, I think that I think people just didn't understand network effects as well. So, the big era of networking kind of started with the internet. And then people thought the internet itself was just a unique network. And it was weird. It was different because nobody... like people got value from things built on the internet, but the internet was not owned by anybody. It was like the kind of first real decentralized network. And so, people didn't know what to make of kind of networks that like... I mean, Facebook early on had, you know, they weren't like a ton of people giving them money for the first round. That's why Peter Thiel was able to do it at a really good price. And then, you know, it's kind of the same thing with Twitter and so forth. Like people just didn't know that basically how invincible those things got when you kind of got them up to strength. So, the bigger... you know, it's basically like an n squared value. So, every node you add kind of increases the value by, you know, kind of n squared. So, like if you have five people on the network, you know, that's 25, but if you have six, that's 36 and so forth. And the value, you know, if you got up to internet size, it's just invincible. Like nobody's going to ever build a rival to the internet or very unlikely. And so, you know, at that point, you know, us being involved in the internet and Twitter and Facebook and so forth, we had a really good understanding of that. And so, you know, we always thought of the firm as a network. And so, you know, from the very beginning, we thought, 'Okay, the more relationships that we have, the stronger our network effect.' And so, we ended up doing things that other firms didn't do. Like we tried to build relationships with like every engineer in Silicon Valley and, you know, every executive and everything. And then every corporation that bought technology and so forth. And we were in our minds creating kind of this network effect that would just make us the best place to raise money from because we were like an automatic... you could tap into that network and become extremely powerful like right off the rip. And, you know, I think a lot of people didn't understand like how hard that was to do. And then the bootstrapping of any network is always the most difficult thing. So, like yes, if you have a network with a billion people on it, it's going to be very valuable, but like, you know, how did Alexander Graham Bell sell the first telephone when there was nobody to talk to? Like that part is actually really hard. And so, figuring that out and how to bootstrap the network effect, you know, kind of coming from behind in venture capital was the idea.

That's getting more important, by the way.

Well, the really simple idea was we knew like venture capitalists made a lot of money, right? So, they would take the fee money and then they pay themselves big salaries. And so, we were like, 'Well, what if we didn't pay ourselves anything?' And we just took all the money and we basically spent it on building this network. So, we would hire people to like bring people in. We, you know, with our kind of, you know, how do you get relationships with every big corporation, FedEx and this and that and the other? And the trick that we had there was we had sold the previous company to Hewlett-Packard. And so, we knew the people in their enterprise briefing center. And so, we would call them every week and say, 'Who's coming to the briefing center this week? And can we get their numbers?' And we would call those companies and we would have them come to our briefing center. And we just show them all the startups. So, it would be like, you know, and we'd have everything they like, all the donuts and all that stuff, you know. So, it was like very un-venture capital-like. But, you know, the corporations loved it. So, all of the sudden, we knew more big companies than VCs who had been around 50 years because we had this hack through the HP enterprise briefing center.

Yeah, well, it was funny because every time we'd meet with our investors, our LPs, they would say, 'Every time we meet with another venture capital firm, all they want to do is talk about you and say mean things.' And I'm like, 'Well, that's fantastic.'

That's good. They used to call us Aho. That was their nickname, the other VCs. You know, they hated us. Some of it was my fault, though. You know, like because when we started, I was coming from enterprise software, which was like a very competitive, bare-knuckle kind of... There is no such thing as co-opetition in enterprise software. It's just like killer be killed. So, I did a... I wrote this blog post called 'Four Things That VCs Do That I Don't Like' where I just like attacked them all. And then I did this big... There was this Sarah Lacy had this big event, and she interviewed me on it. And she's like, 'Well, you know, you seem like kind of you don't like other VCs.' And I quoted Lil Wayne. I said, 'When I see another VC coming at me with the peace sign, all I see is the trigger and the middle finger, you know.' And everybody hated me for that. So, I do remember... But it kind of worked because they hated me so much, they weren't willing to copy what we were doing even though what we were doing was working. So, it kind of backed... I don't know if I would have been that antagonistic again, but you know, it worked, so you can't argue with it.

Yeah. Yeah, what's going through your mind right now? Yeah, I mean, I think so... the big thing that's changed is that... or the kind of most fundamental thing that's changed from the VC standpoint in my mind is it used to be... I mean, for my entire career, the one thing that you knew about technology companies is you can't throw money at the problem. So, if somebody had a two-year lead on you, you could not hire a thousand engineers and catch them. That like was never going to work because, you know, nine women can't have a baby in a month. Like there were just things you could not parallelize, and then the communication overhead would kill you. And my favorite joke used to be, you know, what's a man year? It's like 700 IBMers before lunch, right? Like that's nothing. You can't catch up that way. With AI, that's really changed and that you can throw money at the problem because if you have enough GPUs and enough data, you can basically solve most problems right now. Like that just is what it is. And so now, yeah, the capital race becomes a real thing and you have to think through, okay, code is not really a moat the way it was in the past and like user interface isn't really a moat and so like what is your barrier to entry? Like what is the thing that differentiates you over time? These have become like really different. And it's happening at the same time that, you know, demand for the technology is unlimited because the products work so much better than anything we've built before. Like these AI... I mean, many of you are too young to remember the products of old, but like none of them work this well before. Like this is like wild how well this stuff works.

Well, none of that... but the reason they go that fast is like you use them and you go, 'Wow, this works perfectly.' You know, how can I do more with it? Whereas in the old day, like if you bought Siebel Systems software, it took two years to deploy the thing and a million dollars or a minimum. And like so that's going to limit demand. There is no limit on demand when technology works this well.

Yeah. I mean, the return is crazy, right? Like so I mean, if you make an engineer 20 times as productive, and you're paying that engineer well, if you're Zuck, you're paying that engineer a billion dollars. But you know, like if you're paying whatever, it's going to be at least several hundred thousand dollars a year. That's a hell of a return.

There yeah. Yeah, and this started to become more common, I would say when we were seeing pitches almost a year and a half to two years ago now, right?

Well, I mean, I think saying... I just be careful a little careful with like people don't have access. Okay. Like anybody with a great idea these days has a... like trust me, you have access. In that there's like unlimited money for good ideas currently. You know, maybe that changes over time, but like it's definitely there. And I would just say this, you know, the world is changing and you can just think of it as like the jobs we had before the Industrial Revolution are all gone. And then we've been kind of living with the post-Industrial Revolution and then the post-computer age jobs since then. And we're going to get to like a whole 'nother class of jobs and a whole 'nother class of companies over the next 10 years that replace most of what we have now. And so if you're young, like that's the best thing possible for your career and for your life because in the opposite scenario, where it's all the same companies, then you got to start at the bottom and work 30 years to get yourself to be a middle-level manager, you know, and you've got to politic and then you know, the old people who aren't as smart as you like get all the money and like that sucks. But in this world, it's the old people who have the challenge because they know how to do the old thing. They don't know how to do the new thing. And you can walk in and learn anything. I think that, you know, the main thing is just like understand the future and then the future is yours is the way I would think about it if I was, you know, 19 or 20 years old.

Well, look, I mean, I think that, you know, it always comes down to like can you build something, a product, an organization, a culture, an offering that people want? And then if you don't build it, is it getting built by somebody else? Or do they need you to do that? Does the world need you to do that or it doesn't exist? Is always the best entrepreneurial idea. And so anything that needs to exist that doesn't otherwise exist is a good idea. And then like that was the whole story with a venture capital firm. Now, did the world need another venture capital firm generically? No. Did it need a different kind of venture capital firm? Absolutely, it did. And so that's what we built. Now, I think that's kind of true for... I mean, if you look at OpenAI, they weren't the only ones trying to do AI, right? Like Google... it was assumed like Google was just going to own AI. And then it was panicking everybody, and that's why Elon... by the way, co-founded it with Sam. And Elon's still mad about like what Sam did with it, but that's a different longer story. But, you know, it was one of those things where we need an AI, we need an alternative. The world needs this alternative to Google, and, you know, that becomes a really good idea. So anything... and like the world is changing so fast that the new needs are going to multiply. There's going to be many many things that need to be done. I mean, if you look at... I think, you know, kind of the old... nobody... the one thing that's interesting about the SaaS apocalypse is it's definitely true that like the barrier to entry on like building software and user interfaces is getting much smaller, but by the same token, like kind of the most boring thing in the world is to just like rebuild Salesforce. Like, you know, no... like Salesforce at a half the cost or a quarter of the cost isn't nearly as interesting as like what do you really want for your sales organization? Because it's not that. I mean, I don't think, you know, and then the question is can you build it before they can? But do you really want your sales people like entering data in a crappy user interface and then, you know, most of the things that they work on aren't captured in the system and this and that and the other. Like so, you know, going to the future, figuring out what like in a world of AI, like what does that look like?

Yeah, and sometimes it like when your friends are high in the dorm room and you have that conversation, it sounds really good. It's not actually that good.

Yeah, make sure it sinks in and you still think it's a good idea.

Yeah, like I think the main thing is to just solve a problem. And what tends to happen is when you go to solve a problem, particularly if it's a hard problem, you find some other problem that's more important. I mean, and this is well known in scientific discovery, right? Like penicillin was like an accident. And they weren't trying to solve that one, it just kind of rolled off of the side. And then by the way, like Meta was an accident. He was building Hot or Not. And, you know, he kind of stumbled into like this much bigger idea. And, you know, my friend Drew at Dropbox, you know, he was like literally tired of having USB where he'd have to move his presentation from one thing to another. He was just solving a problem for himself. So, I think the best way to come on a really important idea is to go try and solve something. Not necessarily build a company, just try and solve a problem. And then in that problem, if it's like a problem that you have, that means it's probably real. And then in solving it, you'll likely find something much bigger. And then that may like kind of force you to build a company. And those are the things that work the best that we've seen are these big things. So, I mean, it's really hard to... and even like Elon Musk didn't start his career trying to build Tesla, right? Like he was solving a much smaller problem. And, you know, that's generally how you build up to that. I think it's like trying to swallow the Earth from the beginning with no experience doesn't usually work. It's good for your pitch deck, but it's not good for your company. I think Elon's first attempt was like a classic Yellow Pages competitor or something.

Yeah, Yellow Pages and then PayPal and then, you know, Tesla and SpaceX.

I think it's... I think thinking of it like how big a thing that might going to do is the wrong way to think about it. You have to start with like what problem can I solve? And then you solve... if you can solve that problem, that's where to start. Like you have to size a team. Not everybody is the same. Like different people have different capabilities. You become kind of your most effective self at a different age. Like some people are really good when they...

Zuck is way different now than he was when he was 20 years old. Like I know when he was 20 years old, he just wasn't very good. It's a miracle. If he didn't have a network effect business like that, it wouldn't have worked at all. He developed that entirely over the years. And because he had that kind of business that had a vertical takeoff, he could develop into that. If he didn't have that, he might have been better off finishing Harvard or whatever. That was just one of the things where he happened to solve a problem at that age that was important enough that it created a company.

Mhm. And some good, some bad.